The European Parliament and member states reached an agreement on Tuesday (28 February) to establish requirements for a European green bond standard, to prevent financial greenwashing.

The EU Commission first presented the proposal to regulate the use of the term “European green bond” – or EuGB – for environmentally sustainable bonds in July 2021. The aim of the regulation is to define which financial products can be labelled as European green bonds.

This should help prevent the greenwashing of financial products – something that has been called out by both environmental organisations, like Greenpeace, and international financial institutions, like the International Monetary Fund.

On Tuesday, EU negotiators reached a provisional deal on the rules which should enable investors to better identify bonds aligned with the EU green goals, while also reducing the risk of greenwashing as the green bond market rapidly expands.

“Tonight the EU has taken a big step to green this massive market by adopting the first regulation in the world on green bonds,” EU lawmaker Paul Tang, rapporteur on the file, said in a statement following the agreement.

Commissioner for financial services Mairead McGuinness also welcomed the provisional deal.

“With the European Green Bond Standard, we are creating a new gold standard available to those companies that want to be at the forefront of the sustainability transition,” she said in a statement on Wednesday.

Under the proposed rules, issuers using the European green bond standard will be required to prove that the proceeds from their bond sale are in line with the EU taxonomy rulebook that defines which activities can be considered sustainable. At the same time, they will have a 15% flexibility pocket for economic activities which are not yet covered by the EU taxonomy.

The regulation also establishes a framework to register and supervise independent reviewers tasked with verifying that European green bonds have a positive impact on the environment.

The rules also include a standardised template for issuers of other environmentally sustainable bonds. According to the Commission, the template is expected to prevent overall greenwashing practices in the bond market. However, the use of the template will be “strictly voluntary”, the Commission said.

EU lawmakers also hope that the EU’s Green Bond Standard will be adopted internationally.

“We are confident that this European standard will become a global reference for sustainable investments,” liberal member of the EU Parliament Gilles Boyer said in a statement.

However, the concept of green bonds has been criticised by some NGOs, such as Reclaim Finance, which argued that it allows polluting companies to issue green bonds, as long as the proceeds from the bond sale are used for activities covered by the EU taxonomy.

EU member states and the European Parliament will now have to give formal approval to the regulation, which will apply one year after its entry into force.