EuGB: Maximising the Credibility of Green Bonds

The EuGB Regulation entered into force on December 21, 2023. ESMA has revised the draft RTS under Article 23(6) to take into account these comments and a number of related issues. Furthermore, ESMA considers that the European Commission’s policy approach in proposing the draft European Green Bond Regulation in 2021 was not to accommodate existing national accreditation regimes. The development of RTS and ITS provides ESMA, in its role as the guardian of the financial markets, with the opportunity to further specify the wording of Level 1 provisions, improving clarity for market participants and avoiding undue burdens on its registration and supervisory tasks.

Here is the video we have prepared about the collaboration, in case it is of interest to you:

Main Focus Areas of the Technical Standards:

1. Suitability of Senior Management and Board Members (Article 23(6)):

   • Criteria for assessing professional reputation, skills and qualifications.
   • The excessive burdens of criminal background checks and self-declaration of suitability were considered.
   • ESMA integrated information on prior criminal convictions into the self-declaration.
   • The declaration of conflicts of interest was simplified by eliminating the reference to “close relatives”.
   • The Delegated Regulation (EU) 2025/… details the criteria for determining good repute.

2. Sound and Prudent Management and Conflict of Interest Management (Article 27(2)):

   • Criteria for evaluating the sound and prudent management of external reviewers.
   • Identification, elimination or appropriate management of conflicts of interest.
   • Establishment of internal safeguards, such as corporate governance arrangements, a sound internal control framework and comprehensive organizational arrangements.
   • Delegated Regulation (EU) 2025/… specifies the criteria for assessing the sound and prudent management and the management of conflicts of interest of an external reviewer.

3. Knowledge and Experience of Analysts (Article 28(1)):

   • Criteria for assessing the adequacy of knowledge, experience and training of analytical personnel.
   • The STR approach to prescribing a self-assessment of analytical staff was welcomed.
   • ESMA reduced the minimum frequency of the assessment of analysts’ knowledge and experience to a biannual basis.

4. Subcontracting of Evaluation Activities (Article 33(7)):

   • Criteria for assessing the reliability and capability of external service providers.
   • Ensure that outsourcing does not materially impair internal control or ESMA’s ability to supervise.
   • ESMA adopted a more direct approach to establishing criteria for the capacity of external service providers, ensuring that outsourcing does not impair internal control and ensuring that ESMA’s supervisory capacity is not impaired.
   • Delegated Regulation (EU) 2025/… specifies the criteria in relation to the provision of external reviewer assessment services by third party service providers.

5. Forms, Templates and Procedures for Providing Registration Information (Article 23(7)):

   • Standard forms and templates for application for registration as an external reviewer.
   • ESMA condensed the initial 11 proposed articles into a single article that now refers to a set of annexes, divided by area of relevance.
   • ESMA added a new field to the ITS that requires applicants to submit the date and place of birth of their senior management and board members.
   • Commission Implementing Regulation (EU) 2024/… lays down implementing technical rules for the application of Regulation (EU) 2023/2631 as regards standard forms, templates and procedures for the application for registration as an external reviewer of European Green Bonds.

6. Cost-Benefit Analysis (CBA):

   • The CBA remained qualitative due to the lack of substantial quantitative information.
   • ESMA believes that the benefits of RTS and ITS outweigh the costs, as they provide greater clarity and avoid undue burdens.
   • The CBA addresses environmental, social and governance (ESG) issues.
   • The options considered by ESMA for RTS and ITS promote the Level 1 Regulation by clarifying the scope of application of certain provisions.

7. Advice from the Proportionality and Coordination Committee (PCC):

   • The PCC provided recommendations on ESMA’s proposals, focusing on proportionality and coordination with parallel regulatory frameworks.
   • The PCC highlighted the importance of EU sustainable taxonomy expertise for external reviewers.
   • The Climate Bonds Initiative and ICMA standards should be taken as a baseline.

What is the purpose of the European Green Bond Regulation (EuGB) and why does ESMA develop technical standards (RTS and ITS)?

From December 2023, the EuGB Regulation (Regulation (EU) 2023/2631) aims to set a standard for bonds marketed as green, ensuring that the funds raised are used for environmentally sustainable projects and increase investor confidence in this market. ESMA (European Securities and Markets Authority) is developing technical standards (RTS and ITS) to specify the provisions of the regulation, especially for external reviewers. These standards aim to ensure consistency and quality in the external review process, which is crucial for market credibility.

What aspects of external reviewers does ESMA cover with these technical standards?

ESMA’s technical standards cover several critical aspects of external reviewers, including:

1. Requirements for senior management and board members: Good reputation, skills, professional qualifications and relevant experience.
2. Adequacy of analytical resources: Number, knowledge, experience and training of analysts and others involved in assessment activities.
3. Sound and prudent management: Criteria for evaluating management and the identification, elimination or management of conflicts of interest.
4. Subcontracting: Criteria for evaluating the capacity of external service providers.
5. Registration information: Standardized forms, templates and procedures for the application for registration as an external reviewer.

How does the entry into force of the EuGB Regulation affect external reviewers?

As of December 21, 2023, the EuGB Regulation came into force, establishing a regulatory framework for European green bonds. This means that external reviewers must register with ESMA as of June 21, 2026 and comply with the requirements set out in the Regulation and the technical standards developed by ESMA.

What type of information must external reviewers provide to ESMA during the registration process?

External reviewers must provide detailed information in their application for registration, including:

1. General information about the entity (name, address, legal form, etc.).
2. Ownership structure.
3. Identities of senior management and board members, including date and place of birth.
4. Information on analytical resources (analysts, employees, etc.).
5. Policies and procedures, including conflict of interest management, internal control and personnel training.
6. Information on any subcontracting agreements.
7. Other activities carried out by the entity.

This information must be presented in the standardized formats and templates specified in the ITS developed by ESMA.

How does ESMA assess the “good standing” of senior management and board members of an external reviewer?

ESMA assesses good reputation based on the ability of individuals to perform their duties with honesty and integrity. For this purpose, ESMA considers:

1. A recent criminal record from your home countries (if available).
2. A self-declaration from each member of senior management and the board, disclosing whether they have been subject to criminal convictions, adverse decisions in disciplinary proceedings, adverse judicial findings in civil proceedings, or sanctions by a professional body.
3. ESMA has simplified these requirements to be less burdensome and to respect the laws of different jurisdictions.

What criteria does ESMA use to assess whether an external reviewer has “sound and prudent management”?

ESMA assesses sound and prudent management based on the existence of robust internal safeguards. These include:

1. Solid corporate governance agreements.
2. A robust internal control framework.
3. Comprehensive organizational arrangements to ensure continuity and regularity of operations.
4. Sound administrative and accounting procedures and adequate information processing systems.
5. Safeguarding the anonymity of whistleblowers and prohibiting retaliation.
6. Independence of employees subject to variable compensation agreements.

How does the outsourcing of evaluation activities affect external reviewers under the EuGB Regulation?

If an external reviewer outsources assessment activities, it must ensure that the external service provider has the necessary capability and reliability to carry out the activities in a professional manner. The external reviewer remains responsible for the quality of the assessment and for ensuring that outsourcing does not materially impair its internal control or ESMA’s ability to monitor compliance.

ESMA has established specific criteria for assessing the capability and reliability of external service providers.

What challenges did ESMA and market participants face in the development of the technical standards?

1. Proportionality: Balancing regulatory requirements with the need not to create unnecessary barriers to entry for external reviewers.
2. Clarity: Define concepts such as “sufficient” knowledge and experience of analysts.
3. Costs: Minimize compliance costs for external reviewers, especially with regard to information gathering and evaluations.
4. Confidentiality: Protect commercially sensitive information and client confidentiality during the registration and monitoring process.
5. New regulatory framework: Adapting to a new set of rules and standards, especially in relation to the EU Taxonomy and the EuGB Regulation.

How do you assess the capability and reliability of an external service provider to whom you outsource assessment activities?

The evaluation considers aspects such as the provider’s business model, services offered, ownership, group structure, regulation, personnel qualifications, resources, protection of confidential information, and the existence of cooperation agreements.

How important is the “good reputation” of the external reviewers’ board members?

Good reputation is critical because of the key role they play in ensuring that the external reviewer complies with its regulatory obligations. The assessment is based on past activities that demonstrate the ability to act with honesty and integrity.

What is the main benefit of standardizing reporting requirements through ITS?

The main benefit is the harmonization of reporting requirements through standardized forms and templates, facilitating the submission of registration applications by external reviewers of European Green Bonds.

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