MainStreet Partners has released its latest quarterly GSS Bonds report “Summer Edition”. This edition of the report focuses on the EU Green Bond Standard (EU GBS), which will be effective from December 2024.
The firm writes that the EU GBS is a further anti-greenwashing measure, coinciding with the introduction of the UK FCA’s new Sustainability Disclosure Regime. Considered a voluntary ‘Gold Standard’ for GSS Bond issuers, it aims to enhance transparency, credibility, and the market integrity of Green Bonds across the EU.
Based on MainStreet Partners’ analysis, only 23 per cent of the current stock of Green and Sustainability Bonds could claim alignment with the EU GBS. This represents approximately USD700 billion of assets.
One of the key requirements for the new EU Green Bond Standard is that the proceeds of the bond fundraising should be allocated to projects aligned with the EU Taxonomy, which is a pre-existing part of the EU’s sustainable finance framework. Based on MainStreet Partners’ analysis, for the same set of securities, the average Alignment to the European Taxonomy is 53 per cent (62 per cent for Green Bonds and 21 per cent for Sustainability Bonds).
A comparison with the still low level of Taxonomy alignment at corporate level, on average at 10 per cent across Revenue, CAPEX and OPEX, places GSS Bonds in an ever more definite position within sustainable investment funds mandates.
Pietro Sette, Research Director at MainStreet Partners says: “Based on our research, only 23 per cent of the current stock of Green and Social Bonds could claim accordance with the EU GBS. This is expected to increase as both issuers and investors progressively realise the added benefits of the label, such as smoother compliance with regulation and lower reputational risks. This is something we are already seeing on the market– looking only at bonds issued in 2023 and 2024 globally, eligibility to the EU GBS jumped to 58 per cent.”
MainStreet Partners writes that its GSS Bond Report provides a comprehensive view of how the current stock of bonds fares against its requirements. Here are some highlights:
Geographical Breakdown of EU GBS-Eligible Bonds
· Asian issuers show significant alignment participation with 9 per cent of the eligible volume, in part thanks to the partial overlap of local environmental taxonomies with the EU’s Taxonomy;
· 83 per cent of EU GBS-eligible bonds are issued by European entities, with Germany and France leading the charge. Interestingly, for German issuers, 18 per cent of the total Taxonomy Alignment comes from projects related to “Transmission and distribution of electricity”.
Projects financed by EU GBS-Eligible Bonds
· From a sectoral perspective, Manufacturing plays an outsized positive role in EU GBS-eligible bonds, representing ~5 per cent of the total average Alignment of EU GBS-eligible bonds, compared to non-EU GBS-eligible bonds, where it accounts for only ~1 per cent of the total average Alignment of EU GBS-eligible bonds;
· From a bond’s environmental Impact perspective, on average, CO2 Avoided/Reduced per EUR million invested is higher for EU GBS-eligible bonds, standing at 565 Tons/EUR million , compared to 486 Tons/EUR million for non-EU GBS eligible bonds.
Since 2010, MainStreet Partners’ proprietary GSS Bonds databases have provided a comprehensive set of tools to Asset Managers to measure and manage sustainability risks and KPIs. The four main products applicable to GSS securities are:
· Impact Results – impact data reported by GSS Bonds issuers is aggregated and normalised, based on a set of environmental and social variables;
· Bond Ratings – GSS Bonds are analysed according to a proprietary framework that focusses on issuer-specific and bond-specific factors;
· EU Taxonomy Alignment – environmental projects financed by GSS Bonds are measured against the regulatory criteria. Like ‘Bond Ratings’ and ‘Impact Results’, the data can be aggregated at portfolio level and provide a quantitative indication of its sustainability;
· Use of Proceeds: that is, the use of the capital of the bond, taken from official reports published by the issuer, both on the allocation by category type (e.g. Renewable Energy) and by geographical location where the proceeds are spent.
