The EU's new Green Bonds Regulation and its newfound approach towards securitisation

1. Development of a framework for EU Green Bonds

Green Bonds are financial instruments used to finance projects that have a positive impact on the environment or climate use of proceeds" requirement, ensuring that these are used towards a sustainable activity within the meaning of the Taxonomy Regulation. The European Union's desire to adopt a European regulation establishing a standard for Green Bonds was recently reflected in the adoption by the European Parliament and the EU Council in November of the final version of the EU Green Bonds Regulation.

All of this is part of a wider drive to regulate finance in order to achieve the EU's objective of carbon neutrality by 2050. The EU's intentions have also been illustrated these past years by the establishment of two European regulations, namely the Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation.

The EU Green Bonds Regulation focuses on the use of proceeds arising from the issue of the bonds, with a view to ensure that these proceeds are used towards a sustainable activity within the meaning of the Taxonomy Regulation.

The reasons why market participants are interested in the emergence of an EU green bond market include the diversification of the investor base and the reputational benefits associated with the development of green bond activity.

2.  EU Green Bonds and Securitisation

After an initial proposal of a EU Green Bonds Regulation was published by the European Commission in July 2021, the EBA published a report in June 2022 in order to address the applicability of such draft regulation to the particularities of securitisation operations. 

It suggested some improvements in this respect, in particular as regards the "use of proceeds" requirement, and suggested that this requirement should be applied at the level of the originator rather than at the level of the SSPE issuing the bonds : in other words, from its perspective, what matters is that the originator finances new green assets with the proceeds it receives from the securitisation, rather than whether or not the securitised assets backing the bonds' issuance are green. 

The EU Green Bonds Regulation, effective as of 21st December 2024, has taken into account the suggestions regarding sustainable securitisation outlined in the EBA report, which were favoured by most participants in the securitisation market. While the first EU Green Bonds Regulation proposal in 2021 made no reference to securitisation other than in its explanatory note, the final version included it comprehensively. 

In its dedicated Chapter 3 "Conditions for the use of the designation 'European Green Bond' or 'EuGB' in respect of securitisation bonds", the Green Bonds Regulation outlines the peculiarities of its application towards securitisation Green Bonds following the suggestions of the EBA report:

(a) Article 16 of the regulation lays down the principle that, by default, references to the term "issuer" will apply to the "originator" in securitisation transactions, thereby imposing obligations relating to the use of proceeds from the issue not on the SSPE but on the entity that originated the assets subject to the securitisation;

(b) Article 17 excludes synthetic securitisations from the scope of the EU Green Bonds Regulation;

(c) Article 18 excludes certain traditional securitisation transactions from the scope of the EU Green Bonds Regulation, in particular where the underlying assets finance operations such as the extraction, refining or distribution of fossil fuels; and

(d) Article 19 states that the prospectus published in accordance with the EU Prospectus Regulation, as the case may be, must include a statement that the originator is held responsible for its commitments relating to the use of the proceeds arising from the issue. The article also lists additional disclosure requirements, "on a best efforts basis and to the best of the originator’s ability, on the basis of the available data", including disclosure relating to the proportion of securitised assets which finance activities defined as sustainable under the EU Taxonomy Regulation framework or the proportion of securitised assets not complying with the "do no significant harm" principle of the EU Taxonomy Regulation framework.