image

business forward

EU green bonds may still finance future gas projects - EUobserver

On Tuesday (7 September), the European Commission adopted a proposal to raise €250bn in green bonds between now and the end of 2026 - with around €80bn planned for this year to support Europe's economic recovery from the coronavirus pandemic.

Bonds will be sold by monthly auctions, providing sustainable investors with "a predictable investment calendar," according to the commission, in a first step towards the goal of becoming the world's largest issuer of green bonds.

"Europe will lead by example," Budget commissioner Johannes Hahn said at a press briefing on Tuesday, adding that "the new green bond framework will provide investors with the confidence that their investments are actually green."

However, this round of green borrowing does not align with its own best practice for green borrowing set out by the EU itself back in July.

According to Hahn, the so-called European Green Bond Standard (EUGBS) won't be finished for another "one or two years."

Until then, the current bond scheme is aligned with the International Capital Market Association (ICMA), a market standard for green bonds.

Compliance will, in part, be handed over to Vigeo Eiris, which is part of Moody's ESG Solutions, a private rating agency.

So while the commission aims to "set a gold standard for how companies and governments can use green bonds to finance large scale sustainable projects," for now, it largely follows standard green bond market practices.

Still green?

There are some notable differences, however, between market practice and EU bond regulation. For example, investment in nuclear energy will not be allowed. And projects may not add significantly to greenhouse gas emissions.

While the International Energy Agency (IEA) has reported that new investment in gas projects are not commensurate with the 2030 climate goals, the financing of new natural gas infrastructure with green bonds will be possible in some cases.

Hahn mentioned "distance heating" (a technology that uses rest warmth from power generation for heating) as potential gas projects that might qualify for funding.

On top of these regulatory limitations, member states must prove that at least 37 percent of the recovery funds are used to finance green projects.

The commission will then publish a yearly report showing investors and the public how the proceeds have been used to finance the green transition. This report will be verified by an external auditor, which will be Vigeo Eiris, the private rating agency.

Critics have pointed to a risk here. "Compliance agencies only look at the proceeds; at what the money is used for, they don't look at company strategy," Paul Schreiber, researcher and economist at the NGO Reclaim Finance, told Euobserver.

According to research published by Reclaim Finance: "Only companies that have adopted detailed absolute decarbonisation objectives on all their activities in order to be aligned with a 1.5°C trajectory should benefit from them."

However, by current market standards large energy suppliers, or even gas and oil companies, might use green bond financing for wind or solar projects, while at the same time maintaining or even increasing their investments in fossil infrastructure. In this way, green funding might exacerbate reliance on fossil fuels.

"The EU framework for green bonds as it is set up right now doesn't look at the company level, but country level. And it delegates the compliance work to a private party," Schreiber warned.