EurA is now supporting the creation of frameworks for sustainable financing, which serve as the basis for green, social and sustainability bonds and loans. These frameworks are the basis for an independent review by a second party opinion (SPO). Once the bonds or loans have been issued, we will be happy to advise you on the preparation of your allocation and impact reporting. We also help you to align your financing project with the EU taxonomy criteria in order to position it successfully on the market.
Companies may only finance previously defined and described projects that serve a sustainability purpose.
Sustainability-linked bonds and loans, on the other hand, can be used for general corporate expenditure, but must achieve sustainability targets within the term of the security. The targets must be defined before the issuance and must meet high ambition levels. In this way, investors can be sure that they are contributing to the sustainable development of the company.
Figure 1: Sustainable financing instruments
The requirements for sustainable bonds are regulated by the International Capital Market Association (ICMA) through voluntary principles such as the Green Bond Principles. For loans, there are guidelines from APLMA, LMA and LSTA that are strongly based on the ICMA Principles. These principles have established themselves as the market standard in recent years. Over 90% of green bonds in the EU are issued in accordance with the Green Bond Principles (see figure 2).
Figure 2: Issuance of green bonds according to the most important green bond standards and external reviews in the EU (source: ZEW)
Before issuing green, social or sustainable bonds in accordance with the ICMA guidelines, issuers must prove that they meet the requirements defined in the market standards (see figure 3). It is advisable to draw up a framework – a document that describes all the information on the planned financed project, the process for the selection of the financed projects, the management of the proceeds and the reporting.
The framework is submitted to a sustainability agency or other external auditor before the issuance on the capital market. This confirms in a Second Party Opinion (SPO), i.e. an independent verification, that the financing instrument will serve a sustainable purpose and meets all the requirements of the standard. With an SPO, companies can obtain the label of a Green, Social, Sustainability-Linked Bond, depending on the planned project, and start marketing their bond.
After the issuance, an Allocation and Impact Reporting is required to demonstrate investors how the proceeds were allocated and what environmental or social impact was achieved.
Figure 3: Issuance process for sustainable financing instruments
Only green and social projects in certain subject areas are eligible for sustainable finance.
Green bonds can be used for the following projects:In any case, companies must demonstrate in their framework that their projects generate environmental or social benefits.
The European Green Bond Standard (EuGB), which is intended to be a gold standard for green bonds, will come into force at the end of 2024. It defines the requirements for European green bonds in terms of transparency and reporting.
A central aspect is the inclusion of the EU taxonomy criteria, which precisely define which economic activities are considered environmentally sustainable. According to the taxonomy, renewable energies, environmentally friendly buildings or e-cars, for example, as well as circular economy projects are sustainable. The EU taxonomy comprises six environmental goals, including climate protection and biodiversity.
The EuGB is also intended to counter accusations of greenwashing and strengthen confidence in sustainable financing.
Green, social and sustainable bonds allow you as an issuer to expand your investor base and, above all, signal to your stakeholders that you are committed to responsible business practices.
In addition, such sustainable issuances trigger worthwhile internal change processes at all levels, from the management to the individual departments. Examples include realigning risk management towards sustainability, creating a more sustainable corporate culture, building ESG expertise and changing procurement practices.
You can diversify your portfolio with a sustainable financing instrument. Green bonds are often oversubscribed and not only offer the advantage of potentially tapping into new investor groups, but can also draw a lot of attention to projects that actually deserve it. Market forecasts are also currently positive: The issuance volume in 2024 is expected to be at a higher level than in the previous year (see figure 4).
Figure 4: Global issuance volume of sustainable bonds by category in billion US dollars (source: ICMA)
Are you already planning an issue or do you need further information? Take advantage of our sustainability advice and contact us for a non-binding consultation.
Text: Daria Ezhkova
EurA AG
T- 079619256-0Max-Eyth-Straße 2
73479 Ellwangen
info@eura-ag.com