The International Capital Markets Association (ICMA) has warned that proposed amendments to the European Commission’s initiative to regulate the green bond market could result in a loss of EU sustainable finance leadership, and disruption to the broader international market for sustainable bonds.

The ICMA analysis refers to draft proposed amendments made to the European Green Bond (EuGB) Regulation made by the Rapporteur of the file in the European Parliament. The amendments followed the release in July by the EU Commission of its EuGB regulation proposal, which aimed to establish a voluntary standard for European green bonds, co-existing with existing international market standard represented by the Green Bond Principles supported by ICMA.

The regulation proposals formed part of a series of initiatives adopted by the Commission to promote a more sustainable financial system and help facilitate the necessary investments to advance the EU’s and global climate goals, and marking a significant step towards the goals of the European Green Deal, the EU strategy to transform the region into a modern, resource-efficient and competitive economy.

The proposed green bond rules were designed to help facilitate the financing of sustainable investments through the creation of a ‘gold standard’ for how companies and public authorities can use green bonds to raise funds on capital markets, while meeting rigorous sustainability requirements and protecting investors from greenwashing. One of the proposals was to require funds raised to be fully allocated to EU Taxonomy-aligned projects, full transparency through detailed reporting, and external reviewers ensuring compliance.

In July, the ICMA issued a note responding to the proposals, welcoming the voluntary nature of the EuGB, and its intention to co-exist with the existing European and international green bond markets, but warning that the mandatory EU Taxonomy alignment could hinder the label’s usability and uptake.

The new amendments would dramatically expand the scope of the regulation to cover all types of sustainable bonds, including green, social, sustainability bonds and sustainability-linked bonds as of the regulation’s entry into force.

The Rapporteur’s amendments would also add several mandatory requirements to the EuGB rules. EuGB-labeled issues would require incorporation of an extended factsheet into prospectuses, inclusion of Taxonomy alignment plans based on annual intermediate targets and subject to annual external reviews, and mandatory external reviews for impact reports, among other requirements.

According to the ICMA the increased cost and potential liability for issuers stemming from the new proposals could have several significant detrimental impacts on the sustainable bond market, including pushing issuers to turn to other markets and other sources of finance resulting in market contraction and loss of EU sustainable bond leadership. Additionally, the ICMA warned that the amendments would lead to fragmentation of the international green bond market with the EU following different rules from an international market, significantly disrupting the international sustainable finance market.

In a statement issued by the ICMA, the association said:

“Should the draft amendments be adopted in the final legislation, we expect that only European organisations that feel compelled to access it would do so and these would very likely come from the official sector. Other issuers would simply switch to other sources of European market or bank finance, or access sustainable finance from other jurisdictions. The ensuing contraction of the European sustainable bond market and issuer flight would effectively end the current undisputed leadership of the EU in the international sustainable capital markets.

“This outcome would especially conflict with the original intentions of the legislation to further develop “the market for high quality green bonds, thereby contributing to the Capital Markets Union, while minimising disruption to existing green bond markets…” and support the growth of sustainable finance to fund the European Green Deal.”