We refer to the European Commission’s consultation on the establishment of an EU Green Bond Standard (GBS) and welcome the opportunity to contribute with Norges Bank’s perspective. The Bank limits its input to remarks on the overall position.

Context

The current context is exceptional – health-, economy- and policy-wise. The COVID-19 pandemic has caused a major shock to the global economy. In this unprecedented situation we should be mindful of our longer term objectives. This comprise allowing for structural changes, and not losing sight of continued cooperation across nations to address the global challenge of climate change. Work on climate change and risk is of a cross-cutting nature and a cross-border effort. Developing the green bond market is part of this broad exercise. There is a crucial role to play for international cooperation to introduce sound standards.

General remarks on the green bond market and EU GBS

Green bonds have been issued for over a decade, and although the market share of green bonds globally is still limited, the green bond market has grown significantly since the beginning in 2007, both in terms of volume and in number of issuers. While the market has evolved, and even if the publishing of the Green Bond Principles in 2014 greatly facilitated the market, it is our view that a set of EU GBS now is welcome. Further standardization on green bond issuance may be a prerequisite for more private capital flows towards sustainable investments, contributing to meet the EU’s (and other EEA-countries’) 2030 targets under the Paris Agreement.

Norges Bank has expressed support for the European Commission’s work on sustainable finance in previous consultation responses. We would in particular note the Commission’s efforts to achieve more accurate, material and comparable company disclosures through the revision of the EU NFRD and the objective of creating common definitions of economic activities that can be considered environmentally sustainable, through the development of the EU taxonomy.

The current consultation encompasses 10 recommendations for the establishment of an EU GBS, prepared by the Commission’s Technical Expert Group of sustainable finance (TEG). The TEG bases its recommendations on current best market practice and review from stakeholders. The recommendations therefore take into account the views and concerns of both issuers and investors, and balancing their respective needs to find common ground is in our view essential in order to establish a functioning EU green bond market.

The TEG recommends in Recommendation #01 that the European Commission creates a voluntary standard through a European Commission Communication, to be published at the latest when the Taxonomy Regulation has been agreed by the EU co-legislators. We support this approach with an initial voluntary standard, leaving it for now to the market participants to decide whether to align with the EU GBS or choose to follow other practices. Having gained experience with the voluntary standard, its effectiveness should be evaluated, and if necessary, mandatory requirements could be considered.

Financial stability perspective

Climate risk is of significance for financial stability. Central banks and supervisory authorities can, within their mandates, promote financial stability by helping to pave the way for the financial sector to include climate risks in overall risk assessments and communicate relevant information and by ensuring that financial institutions have adequate capital to cover all risks.

For the green securities market to function well over time, formal and standardized requirements that can be evaluated should be introduced. The absence of such requirements can create uncertainty about whether green financing is actually used for climate-friendly projects. We believe the EU GBS will be a significant step in this process.

Green securitizations may be an opportunity for the financial industry if adequate requirements are implemented. Investors, corporations and authorities are all seeking to achieve climate goals, which may support sustainable investments. The pandemic may further increase the focus on locally made and environmentally friendly projects. However, there may currently be limited volume of sustainable projects available. This may lead to high prices on those projects, and introduce particular price risk on sustainable investments.

Investment management perspective

As a long-term investor of Norway’s Government Pension Fund Global (GPFG), we consider our returns over time to be dependent on sustainable development in economic, environmental and social terms. We therefore have an interest in measures that may contribute to an efficient transition to a low-carbon and more resource efficient economy. We see opportunities in companies that enable more environmentally friendly economic activity. At the end of 2019, the GPFG had 62.3 billion kroner invested in shares in 77 companies and 17.1 billion kroner invested in green bonds under dedicated environmental mandates.

As investors, we rely on accurate and consistent reporting standards to support our decision-making. Developing an EU GBS is a complex exercise, and we support the overall approach chosen by the TEG.  In our view, the proposed EU GBS brings additional clarity to the definition of eligible financial instruments, and how these should be accounted for in disclosures. We support the use of the EU taxonomy as a tool for standardising what can be considered “green” assets in the context of bond classification: standardisation can contribute to more legitimate and well-functioning markets, for example by lowering transaction costs. At the same time we see the need for a certain degree of flexibility, in cases where screening criteria is not yet developed or directly applicable. This is especially relevant given that the taxonomy may evolve over time in order to reflect technological and scientific innovation.

We would emphasize that the proceeds of green bonds should be managed and accounted for in a transparent manner, where all relevant transactions are easily identified. The proceeds should be allocated to the relevant projects as early as possible. In the event that some are left unallocated, the reasons should be made clear to investors and the overall market.

We welcome, through the EU taxonomy, the requirement for issuers to demonstrate alignment with the do-no-significant-harm (DNSH) requirement and minimum safeguards. While we note that this may entail additional efforts on the part of issuers to collect and disclose information, the requirement is broadly in line with our general expectation that companies should account for any significant environmental and social consequences of their business operations.