Green Bond Refinancing: Simplifying Taxonomy Regulations for a Greener EU
By Lars Roh *
Enhancing European Green Bond Growth Through the Omnibus
The complexity of the Taxonomy Regulation has been the subject of debate since its introduction in 2021, with many viewing it as daunting and challenging. Economic activities aren't automatically taxonomically compliant if they contribute substantially to environmental objectives or meet technical criteria. Instead, activities must also adhere to the do-no-significant-harm principle (DNSH) and the social minimum protection. This has created obstacles for companies, especially those in the renewable energy sector, leading to a selective few complying with these stringent requirements.
The challenges are not limited to companies; lending banks refinancing themselves through green bonds to meet the EU Green Bond Standard (EU GBS) also face hurdles. Revenues from these bonds must be used to finance taxonomically compliant activities to at least 85%. However, the strict requirements have left the landscape barren, with only two EU GBS-compliant bond issues across Europe as of now.
A Simpler Path to Compliance and Green Financing
Simplifying the proof of the DNSH principle and social minimum protection could significantly catalyze the EU green bond market, making credit financing accessible to non-reporting companies in the renewable sector, climate tech start-ups, and even private loans for electric vehicles. Proposals submitted by the Platform on Sustainable Finance (PoSF) of the EU Commission in February could be game-changers.
The PoSF proposed streamlining the DNSH requirement and introduced a SME standard for sustainable financing on March 21. Smaller companies could particularly benefit from these measures. If they comply with existing laws, avoid activities excluded from Paris-aligned indices, and meet simplified social standards, they would pass the DNSH and minimum safeguards tests, enabling taxonomy compliance and access to the 'EU Green Bond' financing route.
Additional Ease for Financial Institutions
The PoSF report also proposes easements for credit institutions. Manufacturers would provide DNSH and MS evidence for climate-neutral car loans through a central declaration. Simplifying private mortgage taxonomies using Energy Performance Certificates (EPCs) could significantly increase the refinancing volume of green bonds available to credit institutions.
These measures could stimulate the market for green loans and bonds under the EU Green Bond Standard, facilitating the European economy's transition towards greater sustainability. The Omnibus I package proposed by the EU Commission will determine whether these reforms are adopted. Some proposals, such as simplifying 'Annex C', are partially reflected in the Commission's proposal, while others are still pending.
Support for the Proposed Reforms
Market participants had until March 26, 2025, to respond to the Commission's Call for Evidence on taxonomy reform. There is expected to be broad market support for implementing the PoSF proposals, encouraging the green transformation.
(*) Dr. Lars Röhr is a partner at the law firm Lindenpartners in Berlin.
Enrichment Data:
Broad trends in sustainable finance suggest that reforms could be aimed at clarifying and harmonizing standards to reduce complexity and encourage more issuances, including from Small and Medium-sized Enterprises (SMEs). These reforms might focus on simplifying reporting requirements, providing clearer guidelines on eligible projects, reducing the administrative burden on issuers, and offering incentives for SMEs to participate in green financing. Policy measures such as subsidies or tax incentives could also be employed to bridge the gap between the intention to support green finance and the practical challenges faced by smaller entities in accessing these markets.
- The proposals submitted by the Platform on Sustainable Finance (PoSF) could simplify the taxonomy compliance process for environmental science activities, such as renewable energy sector projects and climate tech start-ups, by easing the do-no-significant-harm (DNSH) principle and social minimum protection requirements.
- Simplifying the proof of DNSH and social minimum protection could also make green bond financing more accessible to businesses, including SMEs and private individuals, by enabling them to finance taxonomically compliant activities like electric vehicles with ease.
- The PoSF's proposed reforms could offer additional benefits to financial institutions by simplifying private mortgage taxonomies using Energy Performance Certificates (EPCs), potentially increasing the refinancing volume of green bonds available to credit institutions and contributing to a smoother transition towards sustainability in the EU's business and finance sectors.
