Green Bonds and the EU Green Bond Standard

What the EU Green Bond Standard is

Green bonds are debt securities whose proceeds finance environmentally beneficial projects or activities. Until recently, the market relied entirely on voluntary frameworks such as industry principles and second-party opinions. The European Green Bond Regulation, Regulation (EU) 2023/2631, created an optional EU standard: issuers that meet its requirements may use the designation "European Green Bond" or "EuGB". The Regulation has applied since 21 December 2024 (Article 72 EuGB Regulation). It does not prohibit other green bonds, but it sets a high-quality benchmark aligned with the EU Taxonomy, with mandatory disclosure and review by registered external reviewers.

For German issuers, including corporates, banks, real estate companies, municipalities and federal states, the standard offers a way to demonstrate the credibility of green bonds to institutional investors who must report on their own taxonomy alignment and sustainability disclosures. It also raises the bar: many projects that qualify under market practice do not yet meet the technical screening criteria of the Taxonomy.

Use of proceeds and taxonomy alignment for green bonds

Before maturity, the proceeds of a European Green Bond must be allocated in full, in accordance with the taxonomy requirements, to fixed assets that are not financial assets, eligible capital expenditure, eligible operating expenditure, certain financial assets, or assets and expenditure of households (Article 4(1) EuGB Regulation). Sovereigns may also allocate proceeds to certain tax relief and subsidies. Operating expenditure counts only if incurred no more than three years before issuance, and financial assets only if created no more than five years after issuance. Issuers may also finance activities that will become taxonomy-aligned within a defined period under a CapEx plan.

The taxonomy requirements derive from the Taxonomy Regulation, Regulation (EU) 2020/852 (Taxonomy Regulation): an activity must substantially contribute to one of the environmental objectives, do no significant harm to the others, comply with minimum social safeguards and meet the technical screening criteria. Because technical screening criteria do not yet exist for every activity, issuers may allocate up to 15 per cent of the proceeds to activities that meet the taxonomy requirements except for the technical screening criteria, where no criteria were in force at issuance or where the activities concern certain international support (Article 5 EuGB Regulation). This is often called the flexibility pocket.

Factsheet, reports and external review

Issuers must complete a European Green Bond factsheet before issuance, obtain a positive pre-issuance review from an external reviewer, and publish both on their website. After issuance, they must draw up an allocation report for every 12-month period until the proceeds are fully allocated and, where applicable, until completion of the CapEx plan (Article 11 EuGB Regulation), obtain a post-issuance review of the allocation report following full allocation and publish an impact report at least once during the life of the bond. Documents must remain available on the issuer's website until at least 12 months after maturity (Article 15 EuGB Regulation).

Where a prospectus is required, the issuer must publish a prospectus under the Prospectus Regulation that designates the bonds as European Green Bonds throughout and states, in the use-of-proceeds section, that they are issued in accordance with the Regulation (Article 14 EuGB Regulation). The factsheet is incorporated by reference. For bonds not requiring a prospectus, such as some private placements, specific publication rules apply instead, and issuers should check them early.

External reviewers

External reviewers must be registered with and supervised by ESMA. During a transitional period from 21 December 2024 until 21 June 2026, reviewers could provide services after notifying ESMA and had to use best efforts to comply with the organisational and conduct requirements (Article 69 EuGB Regulation). Since that period has ended, issuers should engage only reviewers that are registered with ESMA or, for third-country reviewers, recognised or endorsed under the Regulation. Reviewers must be independent of the issuer, avoid conflicts of interest and apply transparent methodologies.

In practice, issuers should agree the scope, timetable and fees of the pre-issuance and post-issuance reviews at the same time, because changing reviewer during the life of the bond adds cost and may raise questions from investors. The engagement letter should also cover access to information and to project data, confidentiality and the reviewer's liability. Where an issuer runs a programme of several EuGBs, a framework-level review can reduce duplication, although each bond still needs its own factsheet and review.

The gradual approach and the portfolio approach

The Regulation offers issuers two allocation methods. Under the default "gradual approach", the proceeds of each bond are allocated to specified eligible uses, and the allocation is tracked bond by bond until the proceeds are fully used. This suits issuers financing identifiable projects, such as a wind farm, a building programme or a fleet renewal, and allows a precise link between each bond and its assets.

Alternatively, issuers may allocate the proceeds of one or more outstanding European Green Bonds to a portfolio of taxonomy-aligned fixed assets or financial assets (the "portfolio approach"). They must then show in each allocation report that the total value of the eligible assets in the portfolio exceeds the total value of the outstanding bonds (Article 4(2) EuGB Regulation).

The portfolio approach is attractive for banks and leasing companies with large pools of green loans and for real estate companies with many buildings. It requires reliable systems to value and monitor the asset pool, including procedures for removing assets that no longer qualify and for replenishing the pool, so that the coverage test is met at every reporting date.

Sovereigns, federal states and regional and municipal entities have a further option: they may allocate proceeds to tax relief, subsidies, intermediate consumption, current transfers within general government and other types of public expenditure, provided that the allocation follows the taxonomy requirements (Article 4(3) EuGB Regulation). For German federal states and municipalities, this widens the range of eligible budget items, but it also requires budget processes that can trace spending to taxonomy-aligned activities.

The investor perspective

For investors, the EuGB designation reduces due diligence effort because the use of proceeds, disclosure and review are standardised and supervised. Insurers, pension funds and asset managers that must report the taxonomy alignment of their portfolios can rely on the issuer's reporting rather than on their own estimates. Fund managers offering sustainable products may find EuGBs easier to fit into binding investment criteria. Investors should nevertheless read the factsheet and the reviewer's opinion carefully, check the share of proceeds allocated under the flexibility pocket, and monitor allocation and impact reports over the life of the bond, because the label guarantees a process, not a particular environmental outcome.

Other bonds and voluntary disclosures

Issuers that do not want to use the EuGB label can continue to issue green bonds under market standards. The Regulation provides optional disclosure templates for bonds marketed as environmentally sustainable and for sustainability-linked bonds, which issuers may use to enhance transparency. Investors increasingly compare non-EuGB green bonds with the EU standard, and sustainability claims in marketing remain subject to general rules on misleading statements, including under prospectus liability and unfair competition law.

Sustainability-linked bonds, whose coupon depends on meeting sustainability performance targets rather than on the use of proceeds, are outside the EuGB designation. They raise their own drafting questions on key performance indicators, target calibration, verification, step-up mechanics and the treatment of recalculations after acquisitions or disposals. In practice, hybrid approaches, such as green bonds issued under a framework that also commits the issuer to transition targets, are also widely used.

Green bonds for German issuers: practical considerations

German issuers have several practical points to consider:

• Issuer type: corporates, banks and real estate companies can finance taxonomy-aligned buildings, renewable energy and grid investments; Pfandbrief banks may combine green bonds with covered bond structures; municipalities and federal states use green bonds for public investment.
• Data: taxonomy alignment requires robust data on energy performance, emissions and climate risk assessments, which must be available at issuance and maintained for reporting.
• Corporate reporting: the factsheet and allocation reports should be consistent with the issuer's sustainability reporting and any transition plan published under the CSRD rules.
• Bond Act: for German-law bonds, majority decisions of holders under the SchVG can be relevant if green commitments must be amended; see our insight on bondholder votes under the SchVG.
• Schuldschein loans: green Schuldschein loans are common in Germany, but as loans they fall outside the EuGB designation; see our insight on Schuldschein loans.

Liability and greenwashing risk

Using the EuGB label creates obligations whose breach can trigger supervisory action and civil liability. National competent authorities supervise issuers' compliance with the publication and prospectus requirements, while ESMA supervises external reviewers.

If proceeds are not allocated as promised, investors may argue that the prospectus or factsheet was misleading. Bond terms should state clearly what happens if allocation falls short, for example whether this is merely a reporting matter or has contractual consequences. Issuers should design internal tracking and governance for allocation, with clear responsibility for monitoring eligibility over the life of the bond, regular reconciliation with accounting data and escalation procedures where assets cease to qualify. For investors, the fund-level rules on sustainability disclosure also matter; see our insight on SFDR disclosure for fund managers.

How TRW & Co helps

We advise issuers, arrangers, investors and external reviewers on green bonds and the EU Green Bond Standard. We review green bond frameworks and asset pools against the Taxonomy, draft factsheets, prospectus disclosure and bond terms, structure green Schuldschein loans and sustainability-linked instruments, and advise on allocation reporting, liability and greenwashing risks. We work with our capital markets and sustainability reporting colleagues. This page is general information, not legal advice. To discuss an issuance, please contact us.