The EIB has been a pioneer and driver of sustainable use-of-proceeds bonds ever since it issued the first green bond back in 2007, the forerunner to a €1 trillion global market in which new issuance is expected to set another record this year.
The supranational has helped propel this remarkable growth over the last decade, having issued over €47bn of Climate Awareness and Sustainability Awareness Bonds (CABs and SABs) across 21 currencies - it is the largest multilateral issuer of this type of securities to date.
Yet the EIB is not only demonstrating leadership in issuance, it also keeps improving its practice and governance, thereby providing a reference for other market participants. “We presently aim to support the sustainable growth of this market by leading the way in the application of evolving EU legislation on sustainable finance,” says Aldo Romani, the EIB’s head of sustainability funding.
The EU bank has actively contributed its project evaluation and sustainability funding experience to the design and promotion of the regulatory framework in Europe. This has evolved in recent years to such extent that it is beginning to form a blueprint for the rest of the world.
A key role is played by the EU Regulation on the establishment of a framework to facilitate sustainable investment (“EU Sustainability Taxonomy Regulation” or “EU STR”), which came into force in July 2020. Also important is the regulation proposal on the EU Green Bond Standard (EU GBS), which was published by the European Commission in July this year.
We presently aim to support the sustainable growth of this market by leading the way in the application of evolving EU legislation on sustainable finance
At its simplest, the EU STR – a pillar of the EU’s Action Plan on Financing Sustainable Growth – sets out common rules for an EU-wide market enabling investors and issuers to assess the environmental sustainability of economic activities by reference to a single set of criteria. These criteria should focus on core aspects of sustainability, be easy to use and to verify. “The ultimate aim is to provide clarity about sustainability and encourage investment in sustainable activities, which, in turn, should help the EU become carbon neutral by 2050 and meet its other environmental goals,” says Romani.
Based on the EU STR, a consistent set of standards can be created for sustainable financial instruments (e.g. green loans and green bonds).
The envisaged EU GBS shares the logic of the Green Bond Principles (GBPs), the voluntary guidelines supported by the International Capital Markets Association, with higher requirements; notably, use of proceeds should be aligned with the EU STR. The EU GBS is therefore designed to become a “gold standard” for investors that are looking to purchase green bonds. “And if the Commission decides to extend the EU STR to social objectives, an EU Social Bond Standard may also be developed, by applying pari passu the logic of the EU GBS to social and sustainability bonds”, says Tomomitsu Maruta, sustainability funding associate officer.
Importantly, the EU STR and EU GBS are not yet set in stone: the delegated acts defining the exact content of the EU Taxonomy are not final, and the EU GBS is still a proposal. For Romani, this generates complexity in the transition to the new regulatory framework, “we are all looking at how best to adapt to something that is taking shape but is very much still under discussion.”
“There are two sources of uncertainty,” he says. “The first is the criteria that eventually will be established as law. The second is the timeline of their definition and entry into force. The question is how to structure your action as an iterative process in the interim, in order to systematically reorganise your approach to sustainability and sustainable investment. This is not something you can implement from one day to the next."
Acknowledgements for timely implementation of EU legislation on sustainable finance
Managing the transition is complex, but the EIB’s efforts to align its CAB and SAB frameworks with the EU STR and EU GBS may help clarify how some of the complexity can be addressed effectively by market participants.
One approach is a clear strategy and a coherent operational framework.
The EIB board of directors (i.e. the EC and the EU Member States) has increased the level of climate and environment commitment for the EIB, effectively transforming it from “an EU bank supporting climate” into “the EU Climate Bank”. The EIB’s “Climate Bank Roadmap 2021-2025” (CBR), approved by the board in November 2020, sets out in detail how the EIB aims to support the objectives of the European Green Deal – the EU’s plan to counter climate change and environmental degradation.
The EIB’s core goals to achieve between 2021 and 2025 include: aligning all new financing activities with the goals and principles of the Paris Agreement; ending financing for new unabated fossil fuel energy projects; gradually increasing the share of financing dedicated to climate action and environmental sustainability (“green finance”) to exceed 50% of new annual operations. On this basis, EIB should support at least €1 trillion of green finance in the next ten years.
We are striving to construct a touchstone to prove that the EU STR is an enabling framework that already permits to reorganise processes with a focus on core aspects of sustainability in order to gain efficiency and a competitive edge
Romani underlines that the roadmap also states the EIB’s plan to align its tracking methodology for green finance with the EU STR and to reflect this to the capital markets by extension of CAB/SAB eligibilities and alignment of the CAB/SAB frameworks with the proposed EU GBS. Sustainability funding has thus become a strategic business development area in the CBR’s implementation plan.
The second approach for effective action lies in early initiative, timely planning and consistent implementation, with close cooperation between the capital market and the project evaluation experts.
The EIB has been proactive from an early stage, not least in creating a dedicated sustainability funding team in September 2018 and at the same time adopting CAB and SAB documentation that provides for the allocation of proceeds “in-line with evolving EU legislation on sustainable finance”. Maruta highlights that this established the legal foundation for the extension of eligibilities in parallel with the application of the EU STR to the lending activities of the bank.
In 2020, the EIB defined an EU Taxonomy alignment transition plan for the reclassification of EIB’s lending activities and could thus lay down initial plans for the gradual extension of CAB and SAB eligibilities over the next five years. First extensions were implemented already last year, with important credibility gains, therefore support, in the dialogue with internal and external stakeholders.
The third approach for effectiveness is indeed a transparent and accountable dialogue with the market.
The EIB’s 2019 CAB/SAB frameworks, published in 2020, already communicated officially to market participants the plan to align with the EU GBS as well as any potential future “EU Social Bond Standard”. Regarding social objectives, which are yet to be covered by the taxonomy, Maruta underlines that the EIB will, in the meantime, present its own definitions in alignment with the logic of the EU STR.
The 2020 CAB framework, published today, and the 2020 SAB Framework, to be published in the coming weeks, now aim to “demonstrate that the principles the EC is establishing can be put into practice, and particularly that you do not need to wait for the entry into force of the EU sustainability taxonomy to take action,” says Romani.
Maruta adds: “We are striving to construct a touchstone to prove that the EU STR is an enabling framework that already permits to reorganise processes with a focus on core aspects of sustainability in order to gain efficiency and a competitive edge.”
New features for the 2020 CAB/SAB frameworks
The 2020 CAB/SAB frameworks – which are audited with Reasonable Assurance (ISAE 3000) by KPMG - present five key enhancements.
Firstly, the EIB describes in detail its strategy for progressive alignment of CAB and SAB with the frameworks established by the EU STR and the proposed EU GBS, “providing clarity on the objectives and the intended implementation plan,” says Romani. As an interim reference, the EIB has used the proposals by the EC’s Technical Expert Group on sustainable finance (the “TEG”).
Secondly, the description of the CAB/SAB administration has been aligned with the logic of the EU STR. “The idea is that until the moment a taxonomy is in place you can use the logic of the taxonomy to structure the way in which you provide information to investors. So it is a reshaping process that permits you to anticipate the regulatory developments”, comments Maruta.
Thirdly, a new annex discloses the 2020 CAB/SAB technical screening criteria for substantial contribution and, where feasible – specifically in relation to CABs, compares them with the TEG technical screening criteria for substantial contribution. “This will shed light on the impact of the full adoption of the TEG criteria, wherever applicable, that EIB has decided for CAB eligibilities in 2021”, says Romani.
The fourth enhancement is a second new annex, where the bank rearranges the information in the frameworks, so far structured to mirror the requirements of the GBPs only, in accordance with the EU GBS template proposed by the TEG in March 2020, enabling a direct comparison between the two.
Fifthly, the allocation and impact reports are being improved in line with the EU GBS-requirements proposed by the TEG. “We aim to increasingly provide the information investors need to describe the sustainability of their investment portfolios, notably by individual issues,” says Romani. “Allocation reports now include, for each bond, summaries by sector, geography, as well as - for CABs - by type of recipient activity (“low-carbon”, “transition”, “enabling”) and - for SABs - by sustainability objective, comments Maruta.
Fundamentally, Romani and Maruta say that all these enhancements are developing new synergies between project evaluation and capital market experts “for the benefit of the bank’s dialogue with its sustainable investors”.
“The process of managing the transition to the new regulatory framework implies a commitment to making clear to investors what is happening in practice” says Romani. “This is a responsibility that the funding officers must take on their side.”