Sweden currently has no laws regulating green bonds, and compared to climate bonds, the standardization of green bonds has not progressed as far. However, a significant step forward was made in 2014 when 13 international banks, including the Swedish financial group SEB, agreed on the Green Bond Principles (GBPs).
The GBPs are voluntary processes that outline best practices when issuing bonds for social and/or environmental purposes through global guidelines and recommendations that promote transparency and disclosure, thereby supporting market integrity. The GBP emphasizes the necessary transparency, accuracy and integrity of information to be disclosed and communicated by issuers to stakeholders through the core components and key recommendations. Four main components to be aligned with the GBP:
- use of proceeds – how the proceeds of the issue are used should be documented in the legal documents of the bond;
- project evaluation and selection process – the issuer must describe the decision-making process to assess whether a project can use green bond capital;
- management of proceeds – the issued proceeds should be placed in a separate account or managed in such a way that it is clear that the money from the bonds is going to the specified projects; and
- reporting – the issuer must provide investors with a list of projects financed by the bond at least once a year.
The GBP recommends using an external party to confirm that the bond meets the four principles. They also call for an independent audit, primarily of how the issuer monitors payment processing and tracking. However, the GBPs are voluntary guidelines that recommend transparency and disclosure and promote honesty in the development of green bonds. Most importantly, they are not regulations.
The GBPs have been used to form the Swedish sovereign green bond system, which contains the four aforementioned main GBP components. The aim of the Swedish sovereign green bonds is to finance a spending portfolio that meets the highest environmental ambitions and is in line with the goal of carbon neutrality by 2045.
Even if sterling constitutes the market standard, Swedish parties are free to choose contractual obligations in civil and commercial matters and thus the provisions relating to green bonds. Issuers typically refer to their own “green bond framework” as set out in their Medium Term Note (MTN) program, with a caveat in the bond terms that their green bond framework may be updated from time to time to reflect, among other things, the EU taxonomy regulation, the EU green bond standard, sterling and best practices in the market.
It should be noted that the EU Taxonomy Regulation does not apply directly to bond issuers; however, it does have an indirect impact on issuers, as the regulation imposes requirements that covered participants, for example, be able to indicate how their portfolios are compliant with the EU Taxonomy Regulation.
Today, the GBP and other existing forms of self-regulation pose various challenges, especially for investors. The main challenge from an ESG perspective is greenwashing. If companies participate in green bonds and issue green bonds whose proceeds are used for projects that are not really green, this can damage the credibility of both the individual company and the green bond market. In addition, there is a risk that the issuer’s own framework does not meet all the requirements, wishes or specific investment mandates of investors. Given that the issuer reserves the right to change the green terms and conditions, and that market practices may evolve after the date of issuance for a particular MTN, there is a risk that such MTN will not meet future regulations, principles or standards.
On June 18, 2019, the European Commission’s Technical Expert Group (TEG) on Sustainable Finance published the group’s final report on the EU Green Bond Standard. The report proposes that the European Commission introduce a voluntary EU standard for green bonds. The main goal of the proposal, which is currently being discussed by the European Parliament, is to create a new “gold standard” for green bonds that will raise the level of environmental ambition. The Swedish government has clearly welcomed the proposal for a voluntary EU standard, and once the EU standard is adopted in Sweden, the regulation will set a new standard for how companies and public authorities can use green bonds in Sweden to raise funds on the capital markets to finance such ambitious large-scale investments.