The EU supports green bonds even more than before

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We have seen a rapid growth of the green bond market in recent years, with significant investor interest, which is expected to continue after a short pause this year – explained the situation Ákos Veisz, head of the ESG business at BDO in Hungary. Due to the guidelines of the nervous agreements adopted at the end of February, there will be changes in the relevant regulations of the EU GBS, which are important to pay attention to not only as bond issuers or investors, but also for those who are thinking about borrowing in the future or who wish to participate in EU tenders.

On February 28, 2023, the European Council and the European Parliament reached a temporary agreement on the creation of a standard for European green bonds (EU Green Bond Standard) – highlights Ákos Veisz. The agreement is temporary and must be applied 12 months after its entry into force, so there will be time for preparation. Since the EU GBS fundamentally changes the existing standards, it is definitely worth monitoring the developments of the new standard.

Green bond issuance accounts for approximately 3-3.5% of the entire bond issuance market

In order to achieve the goals set out in the Paris Agreement, the green bond market must also grow faster than before, and the declared goal of adopting the EU GBS is to support this.

In Hungary, the first issue of green government bonds took place in June 2020 in the amount of 1.5 billion euros, and then in the Japanese market in the amount of 20 billion yen. The goal of the Hungarian State, as the issuer, was to collect funds for government investments related to domestic climate and environmental goals. According to the National Clean Development Strategy of our country, the support of domestic corporate, banking and municipal green bond issues is also a priority.

Achieving a climate-neutral transition in Hungary by 2050 requires an investment of approximately HUF 50,000 billion, for which, among other sources, domestic companies can also issue bonds. In addition to the sovereign green bond issues, 13 green bond issues will be realized within the framework of the Growth Bond Program until November 30, 2021, while we can talk about a growing market – added Ákos Veisz.

At the same time, the EU GBS regulation ensures that the funds collected during the bond issue are used for green activities, and the bonds must be examined by professional and independent auditors. The EU GBS is in line with the legislation on Taxonomy, which defines which economic activities can be considered sustainable according to which technical and other parameters. EU GBS issuers will have to ensure that at least 85% of the funds from the bonds are used for economic activities that meet the Taxonomy’s sustainability criteria. At the same time, the specialist drew attention to an important change: “In the future, those companies will be able to issue green bonds that can sufficiently substantiate this compliance.”

What are the advantages of issuing bonds according to the EU GBS, from the point of view of investors and issuers?

Issuance of green bonds according to the EU GBS allows investors to direct their investments more safely towards more sustainable technologies and businesses, helps in identifying high-quality green bonds and companies, thereby contributing to the reduction of greenwashing.

For the companies issuing the bonds, it will provide greater certainty that their bonds will be suitable for investors looking for green bonds in their portfolios, which is otherwise an undervalued option for many company managers and owners in our country,” added the head of BDO Magyarország’s ESG division.

The EU GBS also clarifies what economic activities can be carried out from the income from bonds, introduces a clear reporting procedure on the use of income from the sale of bonds, and also unifies the work of external auditors.

The EU GBS therefore encourages companies to issue green bonds and offers investors a more transparent investment option. In order for companies to be able to issue this type of bond, the most important step is to be aware of the EU Taxonomy criteria for their activities. In other words, with the help of experts, the technical and activity parameters for the given company and industry, which the EU examines, must be effectively identified and complied with. This compliance will be required not only for green bonds, but also for obtaining bank loans and EU funds, so it is recommended to learn this approach and business management vision as soon as possible – Ákos Veisz concluded the professional summary.