Just 23% of the current stock of green, social and sustainable (GSS) bonds could claim to align with the EU Green Bond Standard (EU GBS), which is due to come into effect in December 2024, analysis by MainStreet Partners shows.
One of the key requirements for the new EU GBS is that the proceeds of the bond fundraising should be allocated to projects aligned with the EU Taxonomy, which is a pre-existing part of the EU’s sustainable finance framework. According to MainStreet’s latest quarterly GSS Bonds report, for the same set of securities, the average alignment to the European Taxonomy is 53% (62% for green bonds and 21% for sustainability bonds).
In comparison with the still low level of Taxonomy alignment at corporate level – on average at 10% across Revenue, CAPEX and OPEX – GSS bonds are placed in an ever more definite position within sustainable investment funds mandates, concludes the report.
The EU GBS is designed as a further anti-greenwashing measure, coinciding with the introduction of the UK Financial Conduct Authority’s Sustainability Disclosure Regime. Considered a voluntary ‘Gold Standard’ for GSS bond issuers, it aims to enhance transparency, credibility and the market integrity of green bonds across the EU.
Pietro Sette, research director at MainStreet Partners, said that, despite the alarmingly low number of GSS bonds aligning with the EU GBS, this is expected to increase as both issuers and investors “progressively realise the added benefits of the label”, such as smoother compliance with regulation and lower reputational risk.
“This is something we are already seeing on the market – looking only at bonds issued in 2023 and 2024 globally, eligibility to the EU GBS jumped to 58%,” he added.
Geographical breakdown
Focusing on specific regions with EU GBS-eligible bonds, the analysis found that Asian issuers show significant alignment participation, with 9% of the eligible volume. This is in part due to the partial overlap of local environmental taxonomies with the EU’s taxonomy.
Additionally, 83% of EU GBS-eligible bonds are issued by European entities, with Germany and France leading the way. For German issuers, 18% of the total Taxonomy Alignment comes from projects related to the ‘transmission and distribution of electricity’.
From a sectoral perspective, manufacturing plays an outsized positive role in EU GBS-eligible bonds, representing roughly 5% of the total average Alignment of EU GBS-eligible bonds, compared to non-EU GBS-eligible bonds, where it accounts for only 1% of the total average Alignment.
