Recommendations on EU Green Bond Regulations
The International Capital Market Association (ICMA) releases a response document aimed at providing recommendations on EU green bond regulations.
The European Securities and Markets Authority (ESMA) released a consultation document on EU green bonds in the first quarter of this year, collecting opinions from market participants on the Regulation on European Green Bonds (EuGB Regulation), and plans to submit the recommendations to EU by the end of this year.
Related Post: European Securities and Markets Authority Releases Consultation Paper on European Green Bond Regulation
ESMA’s Consultation on EuGB Regulation
The European Securities and Markets Authority has released Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS) related to the EU’s green bond regulations. The Regulatory Technical Standards have four parts, while the Implementing Technical Standards have one part:
- Regulatory Technical Standard 1: Senior Management and Analytical Resources.
- Regulatory Technical Standard 2: Sound and Prudent Management and Conflicts of Interest.
- Regulatory Technical Standard 3: Knowledge and Experience of Analysts.
- Regulatory Technical Standard 4: Outsourcing of Assessment Activities.
- Implementing Technical Standard 1: Forms), Templates and Procedures for Registration.
All regulatory and implementation technical standards are aimed at external reviewers of green bonds. These standards require external reviewers to have necessary governance mechanisms and professional talents to provide external audit opinions on green bonds.
ICMA’s Recommendations on EuGB Regulation
As an important player in the global sustainable bond market, the Green, Social, Sustainability, and Sustainability linked Bond Principles released by the International Capital Markets Association have been applied to 97% of newly issued bonds. ICMA also released a report providing guidance for external reviewers. ICMA’s recommendations on ESMA’s consultation documents as follows:
1. Regulatory technical standards should be simplified to reduce the workload of external reviewers. The International Capital Market Association believes that the consultation document requires each external reviewer to provide a large number of contents such as senior management governance structure, internal control, employee experience and outsourcing framework. These contents may impose a significant burden on external reviewers, and some small-sized external reviewer may not afford the time and money preparing these document. Therefore, regulatory technical standards may need to be adjusted to ensure fair competition among different types of external reviewers.
2. The EU’s green bond regulatory policy needs to be consistent with the EU’s ESG rating regulation. Due to the fact that many external reviewers also provide the issuer’s ESG rating while reviewing green bonds, the same entity may need to comply with both green bond and ESG rating regulations. The International Capital Market Association suggests that two types of regulatory policies can maintain the same governance requirements and avoid conflicts between them.
3. Clarify the outsourcing rules for evaluation activities. The regulatory technical standards mention that external reviewers can outsource audit work to third-party institutions, but they need to confirm that these institutions can provide objective and professional opinions. The International Capital Market Association believes that when the parent, subsidiary, and affiliated companies of external reviewers act as third-party institutions, they should not be considered as outsourcing, and should not be subject to outsourcing rules.
4. Add the requirement for analysts to master the EU Taxonomy. As an important part of the EU’s sustainable regulations, the EU Taxonomy can evaluate whether the economic activities of bond issuers meet sustainability standards and it can provide assistance for external reviewing of green bonds. The International Capital Market Association believes that analysts should have a certain level of mastery of the EU Taxonomy through self-declaration. ESMA may gradually increase the requirements for analyst experience in the future.
Reference:
ICMA Responds to the Technical Standards Proposed by ESMA for External Reviewers of EuGBs
