The EU’s draft taxonomy is, in many respects, welcome. Based on scientific evidence, it could have a meaningful impact on what needs to happen if climate change is to be avoided.
But the rules mean that green senior unsecured and covered bonds will no longer be considered as eligible green collateral. This could cause investors to shy away from the product for which there are great hopes.
Green bank finance funds the top 15% of the most energy-efficient buildings in any given country. And with building standards improving, more of that sort of funding will be needed, creating a need for green senior unsecured and covered bonds.
The EU's plans would cut the stock of eligible buildings to just the top 1% — those with the very highest energy efficiency rating.
The aim is laudable but apart from cutting the supply of eligible green collateral to virtually nothing from day one there’s another major problem.
Among the six energy performance certificate categories that range from A — the level the EU's plans limit themselves to — through to F, the actual energy consumption varies wildly depending on the country. An A rating in one country could be a D in another.
So until the system is harmonised the EU's proposal is likely to hurt the countries with the most ambitious energy reduction targets most, and this must surely be counterproductive to the EU’s aims.
“We are once again looking at a classic conflict of aiming high to achieve a noticeable change in behaviour, but at the same time not choking off the very success of an initiative by being too ambitious and making it near impossible for market participants to comply,” said Florian Eichert, head of covered bond and SSA research at Crédit Agricole.
A transparent and credible tightening in building regulations will ultimately drive improvements in buildings’ energy performance. This would be a far better way of driving change rather than making indiscriminate rulings that risk disincentivising the most conscientious countries.
Meanwhile, unless the EU finds a way to encourage issuance, the green bank finance market could simply cease to exist.