ESG disclosures in a debt capital market perspective

Sustainability (ESG) disclosures in prospectuses concerning green bonds, sustainability-linked bonds and bonds in general

Regulatory spotlight has recently been pointed at ESG disclosures in marketing materials, for example investor presentations and prospectuses concerning, in particular, green bonds, but also in respect of sustainability-linked bonds and bonds in general.

In July 2023 ESMA published a statement addressed to national competent authorities regarding ESG disclosures in prospectuses. The statement outlines how national competent authorities should address issuers' (of both equity and non-equity securities) sustainability (ESG) disclosures in prospectuses under current applicable rules, namely the Prospectus Regulation.

According to a statement published by the Danish FSA in September 2023 regarding the ESMA statement, issuers of bonds should make the following considerations with respect to ESG-related disclosures:

1. As regards prospectuses concerning green bonds, such prospectuses should follow the Danish FSA's guidelines on disclosure requirements in prospectuses for green bonds, published in October 2022. Read more in our article from October 2022 covering the Danish FSA's guidelines.
2. As regards prospectuses concerning sustainability-linked bonds, such prospectuses should include information about the selected key performance indicator(s) (KPIs), the sustainability performance target(s) (SPTs) and information enabling investors to assess the consistency of the KPIs and its associated SPTs with the relevant sector-specific science-based targets and the issuer’s sustainability strategy.
3. As regards prospectuses concerning bonds in general, the issuer should consider whether it is relevant to include ESG disclosures in the prospectus on the basis of the general applicable materiality test in the Prospectus Regulation.

Issuers should take note that the so-called EU Listing Act includes a proposal to authorise the Commission to adopt a new annex to the Delegated Prospectus Regulation (on form and content) specifying the ESG-related information to be included in prospectuses for bonds that are "advertised as taking into account environmental, social or governance (ESG) factors or pursuing ESG objectives". The EU Listing Act is still subject to the EU legislative procedure.

The requirement of consistency between marketing materials and the prospectus in the context of ESG disclosures

Bond issuers should also be aware that the Danish FSA, according to the Danish FSA September 2023 statement, deems inclusion of ESG disclosures in marketing materials (for example an investor presentation) to "clearly indicate" that such disclosure is considered material for the purpose of the general applicable materiality test in the Prospectus Regulation. Further, the Danish FSA states that they find it "problematic" if sustainability (ESG) disclosures are included in marketing materials, but not in the prospectus. Finally, the Danish FSA underlines the requirement in the Prospectus Regulation for consistency between information included in marketing materials and the prospectus. 

The EU Green Bonds Regulation: What does it entail, when will it apply, and will it become the market standard for green bonds going forward?

The European Union (EU) is taking a further step towards widening the scope of sustainable finance options with the European Parliament's approval, in the beginning of October 2023, of the Regulation for European Green Bonds and the Council adopting the same on 23 October 2023 (the "EU Green Bonds Regulation"). The EU Green Bonds Regulation is now to be signed and thereafter published in the EU's Official Journal before entering into force 20 days later. It will start applying 12 months after its entry into force.

This eagerly awaited standard, following extensive negotiations, forms a critical part of the EU's broader sustainable finance agenda. In the following, we cover certain key elements of the EU Green Bonds Regulation.

The EU Green Bonds Regulation will be a voluntary standard for all issuers, but comes with the exclusive right of labelling the bonds as "European Green Bonds" or "EuGB"

The voluntary nature of the EU Green Bonds Regulation has been a subject of intense debate. Whilst it has been discussed to make the EU Green Bonds Regulation mandatory within a certain time frame or in respect of certain issuers, concerns were raised by market participants about its potential impact on market dynamics.

The EU Green Bonds Regulation only applies to "use of proceeds" green bonds and not sustainability-linked bonds. This being said, the EU Green Bonds Regulation provides optional sustainability disclosure for bonds marketed as "environmentally sustainable”, for example green bonds that do not meet the 85% EU Taxonomy Regulation alignment requirement (see below) and for sustainability-linked bonds.

The EU Green Bonds Regulation requires that a prospectus for the European Green Bond is prepared in accordance with the Prospectus Regulation and that the European Green Bond is listed on a regulated market.

Key elements of the EU Green Bond Regulation

Alignment with the Taxonomy Regulation	Proceeds from the European Green Bond must be allocated to finance activities in alignment with the EU Taxonomy Regulation. These activities can be funded directly, e.g. by purchasing fixed assets or indirectly by purchasing financial assets (e.g. loans), subject to certain requirements of allocation of such financial assets. The EU Green Bonds Regulation also allows for a "portfolio approach" enabling the issuers to allocate proceeds from one or more outstanding European Green Bonds to a portfolio of fixed assets or financial assets, subject to demonstration in the allocation reports that the total value of the assets in the portfolio exceeds the total value of their outstanding European Green Bonds.
Flexibility pocket in respect of the EU Taxonomy Regulation alignment	Recognizing that not all economic activities are currently covered by the EU Taxonomy Regulation's technical screening criteria, the EU Green Bonds Regulation includes a flexibility pocket for allocation of up to 15% of the net proceeds of the European Green Bonds issuance to certain activities that are (i) economic activities in respect of which no technical screening criteria have entered into force by the date of issuance of the European Green Bond, subject to the issuer's compliance with the Do No Significant Harm principle under the EU Taxonomy Regulation; or (ii) activities in the context of international support reported in accordance with internationally agreed guidelines, criteria and reporting cycles.
European Green Bond factsheet	Issuers must publish a European Green bond factsheet (similar, but wider in scope, to a green bond framework) before issuance of a European Green Bond. The EU Green Bond Regulation includes a prescribed template to be used, which includes comprehensive information on the European Green Bond's expected contribution to the issuer's environmental strategy, EU Taxonomy Regulation alignment, transition plans, environmental impact, and more.
Reporting requirements	The European Green Bonds Regulation mandates various reporting requirements to be based on standardised templates set out in the EU Green Bonds Regulation, including allocation reports to be published annually until full allocation of the proceeds from the European Green Bonds and an impact report describing the environmental impact of the use of the bond proceeds.
External review	External review of the European Green Bonds is a cornerstone of the EU Green Bonds Regulation. The European Green Bond factsheet must be subject to a pre-issuance review with a positive opinion by an external reviewer, and the allocation reports must be subject to a post-issuance review of the allocation report drawn up after the full allocation of the proceeds of the European Green Bond. Issuers of European Green Bonds may seek a review by an external reviewer of the impact report.
Supervision of external reviewers	The EU Green Bond Regulation outlines detailed rules for external reviewers, including their registration with the European Securities Markets Authority (ESMA) and supervision of the external reviewers. Furthermore, external reviewers are required to meet specific organisational and governance requirements and comply with various other requirements.
Sanctions for non-compliance with the EU Green Bonds Regulation	The EU Green Bonds Regulation also introduces certain sanctions for non-compliance with the EU Green Bonds Regulation, including fines of up to 0.5 % of annual turnover, prohibiting the issuance of European Green Bonds for a period not exceeding one year and making public the fact that an issuer of European Green Bonds has failed to comply with the EU Green Bonds Regulation.

While many of the elements of the EU Green Bonds Regulation will be familiar for issuers of green bonds and sustainability-linked bonds, issuing European Green Bonds will be more complex and more costly than issuing green bonds or sustainability-linked bonds under the current market standards, namely the ICMA Green Bonds Principles and Sustainability-Linked Bond Principles. This being said, time will tell whether issuance of European Green Bonds will become the new market standard, to what extent investors in scope of the Sustainability Related Disclosures Regulation (“SFDR”) will request investment opportunities in European Green Bonds to align such investments with reporting obligations under the SFDR, whether pricing will become more attractive for European Green Bonds and whether other existing market standards will be amended to align, at least to some extent, with the principles of the EU Green Bonds Regulation. 

Kromann Reumert has extensive experience in advising on issuances of green bonds and sustainability (ESG) disclosures in marketing materials and prospectuses. Please reach out to Peter Kirkehei Qvist or August Nicolai Fristad Boe to discuss any of the topics covered.

In today's dynamic business world, ESG integration is crucial. We offer expert legal guidance on sustainable practices and due diligence. Meet our ESG team below.