The first legislation relating to an EU sustainable finance taxonomy will come as early as this spring, according to Commission vice president Valdis Dombrovskis, who said today (Friday) that a green bond label will be part of its action plan and a green supporting factor is still on the cards.

Dombrovskis, vice-president responsible for financial stability, financial services and Capital Markets Union (CMU), at the European Commission, made his remarks at a Brussels event to mark the handover of the final report of the High-Level Expert Group (HLEG) on sustainable finance. Such a taxonomy – to be introduced by 2020 – and the development of official green bond standards this year and ultimately a label were among priority HLEG recommendations in the report, published on Wednesday.

“First,” said Dombrovskis, “it is clear that we need a unified EU classification system – or taxonomy – for sustainable assets. This will help us define what is green and what is not green, and identify the areas where sustainable investment can make the biggest impact. This is fundamental for the development of any green finance policy.

“We will follow up this recommendation with the first piece of legislation in spring as regards the governance of this EU taxonomy.”

He also highlighted the need to further develop the green bond market.

“With a unified classification system in place, we intend to establish criteria and labels for green bonds and investment funds,” said Dombrovskis. “These labels would help investors to easily identify financial products that comply with green or low carbon criteria.”

In its report, the HLEG proposed that an EU Green Bond be defined as any type of listed bond instrument meeting all of the following requirements (in the report’s words):

- The proceeds will be exclusively used to finance or refinance in part or in full new and/or existing eligible green projects, in line with the future EU Sustainability Taxonomy

- The issuance documentation of the bond shall confirm the intended alignment of the EU Green Bond with the EU Green Bond Standard

- The alignment of the bond with the EU Green Bond Standard has been verified by an independent and accredited external reviewer.

An issuer would only be able to use the term EU Green Bond if all three criteria are met. The HLEG says the objective of the proposed EU Green Bond Standard is to create a standard that can serve as reference for other sustainable financial products such as social and sustainable bonds, as well as green, social and sustainable loans.

“The proposed EU GBS would incorporate existing best market practice while at the same time addressing uncertainties and areas of concern that may require greater prescription or more explicit criteria,” it said. “The prime objective of the standard is to help raise overall investments in green projects and activities, and its success should be monitored and assessed against this benchmark.”

Ahead of the report and the anticipated Commission action plan, some market participants – while encouraged by the overall initiative – have raised concerns that minimum standards could restrict the market’s development and innovation.

The International Capital Market Association (ICMA) – which runs the Green Bond Principles and whose senior director Nicholas Pfaff was an HLEG observer – said the proposed taxonomy would provide additional clarity and detail for issuers and investors in the green bond market, and noted the recommended standard.

“As the report itself underlines, the challenge will be to find the right balance in implementation and to not increase the regulatory burden and complexity given the ultimate purpose is to facilitate more investment,” it added.

The expert group was ambivalent on the idea of lowering capital requirements for green assets through a so-called green supporting factor, but Dombrovskis today reiterated the Commission’s interest in the concept – while acknowledging concerns noted in the HLEG report.

“We could boost green investments and loans by introducing a so-called green supporting factor,” he said. “This could be done at first stage by lowering capital requirements for certain climate-friendly investments, such as energy-efficient mortgages or low carbon cars.

“However, green does not mean risk-free. I believe that any measures would have to be carefully calibrated, and based on a clear EU classification.”

Dombrovskis said the Commission is reviewing other HLEG recommendations and how best to take them on board.

“The HLEG initiative from the Commission has been an incredible success and has been much more broadly applauded and welcomed than anticipated,” said HLEG member Sean Kidney, CEO of the Climate Bonds Initiative, which runs the Climate Bonds Standard and certification scheme. “The range of recommendations and proposals can make a substantial difference in ensuring the financial system supports the achievement of sustainability goals and environmental action.”

A conference on sustainable finance is being held by the Commission on 22 March in Brussels.