Gradual taxonomy application will facilitate buy-in, EIB says

From the vantage point of a major global issuer of green- and sustainability- use-of-proceeds bonds, European Investment Bank observes that taxonomies reinforce the capacity of these bonds to enhance clarity and comparability in sustainable finance.

For investors, this is a major potential improvement that facilitates their decisions. Issuers, meanwhile, have the opportunity to kick-start a change management process that goes wider than just identifying assets complying with criteria established by law. For this purpose, they need to be encouraged with practical guidance on how to gradually apply the taxonomy to their bonds and make the related process monitorable by investors.

Aldo Romani is head of sustainable finance in the finance directorate of European Investment Bank (EIB) in Luxembourg, and a member of the EU Platform on Sustainable Finance (EUPSF), a body created by the EU taxonomy regulation to secure ongoing exchange between markets and legislators on usability aspects of the taxonomy. He is confident the use-of-proceeds (UOP) green-bond market is on the cusp of major steps forward – including in Australia, where he has been watching local developments closely.

UOP bonds clearly play a significant role for EIB. Nearly 30 per cent of the supranational’s total issuance in 2024 came in Climate Awareness Bond or Sustainability Awareness Bond format, a €3.7 billion (US$4 billion) step-up in absolute issuance volume versus 2023 given EIB’s larger overall funding task for the year (see box).

With a concentration of new eligible disbursements accumulating toward the end of the calendar year, Romani says EIB could have issued an even larger amount and is well set for new issuance in this format at the start of 2025.

But it is wider developments in the sustainable debt market that Romani is particularly attentive to. He observes that Australia is making rapid progress – and not only in the form of increasing market size. One foundation stone was the 2024 green-bond debut of the Australian Office of Financial Management. As well as being a benchmark transaction in its own right, Romani argues that “the sovereign milestone sets a clear course for the direction of travel”.

GREEN-BOND BENEFITS

Romani also believes the forthcoming local sustainable finance taxonomy will reinforce the role of green bonds. “Properly structured, green bonds are a source of reliable information that can be used to clarify the status quo and promote improvement in a manageable way,” he explains. “Alignment with the Green Bond Principles offers an ideal starting point for the step-by-step application of the individual components of the taxonomy to activities that are eligible for allocation.”

From EIB’s perspective, improved international comparability and interoperability can be further positive outcomes of the Australian taxonomy. Romani notes that the Australian Sustainable Finance Institute’s interim report on the taxonomy, published in September, takes stock of existing sustainable finance frameworks in the EU and other jurisdictions including Singapore and the ASEAN region.

Funding EIB in a changing SSA landscape

European Investment Bank (EIB) has a stable funding requirement and a consistent issuance strategy even in the midst of a shifting landscape for supranational, sovereign and agency (SSA) debt. Jorge Grasa, senior funding officer at EIB in Luxembourg, discusses its place in the global and Australian markets.

The past year was a positive one in funding markets, generally speaking. How has the experience been for EIB?

It has been very much business as usual. Our funding programme increased to €65 billion (US$70.7 billion), from €60 billion.

As in previous years, euros and US dollars have been our main currencies, followed in 2024 by sterling, Polish zloty and Australian dollars. In this sense, it has been very stable.


One thing that is changing is issuance dynamics, whereby supranational issuers’ funding requirements are relatively stable while sovereign issuers continue to grow. In Australia, semi-government issuance is one of the big growth stories. Does the supply story concern an issuer like EIB?

As always, we have to read the market well to pick the correct windows and there is always a competition to be first in the market. We will continue to have close dialogue with our banks and investors to make sure we are issuing at the right times, sizes and maturities to execute successful deals.

In the Kangaroo market specifically, the positive thing is that there has been a lot of demand and some very big books were achieved in 2024. Republic of Korea, for instance, issued for the first time in November and the book size for this deal was very impressive.

Some of the demand is focused on relative value. But with levels going a bit wider, hopefully this means another group of investors that is interested in the SSA sector. We would like to at least maintain our share of the Kangaroo market if not to increase it a little – and we are hopeful that we will be able to do so.

Specifically in Australia, 2024 saw a significant uptick in supply from Canadian SSA names in particular. Given these issuers typically offer a little more yield than traditional SSA borrowers, are you concerned that names like EIB could be left on the outside?

The Canadian names have focused mostly on the 10- year part of the curve so far, and largely because this offered them a cost saving relative to other markets they could access in this tenor.

In my view, their presence has really helped this part of the curve. It used to be really dependent on the Japanese bid, which has dried up to some extent, so it is great that the Canadians have uncovered the fact that there is a pool of investors in the long end.

We will see in 2025 whether the Canadian issuers continue to focus on this part of the curve or whether they become more present in the mid-part of the curve, too. Either way, from my perspective their presence in the Australian market is a good development overall.

Notably, the Australian taxonomy objectives are the same as those of the EU taxonomy. Further, the report includes a comparison between the ANZ Standard Industrial Codes, their international equivalent and the NACE (nomenclature des activités économiques) codes that are used in the EU as the foundation of taxonomy-based classification.

“There is a clear attempt to enhance the comparability of taxonomy-based reporting,” Romani says. “This endeavour fits into the broader perspective of the November report of the International Platform on Sustainable Finance on the so-called ‘common ground taxonomy’1. Australia and New Zealand are also part of this platform.”

TAXONOMY ALIGNMENT

With climate disclosure requirements beginning to roll out from the start of 2025 and the final iteration of the Australian taxonomy set for publication in mid-2025, these developments are no longer theoretical. The EU experience hints at the value of green bonds in this context.

In January 2024, the EUPSF published a Compendium of Market Practices 2, the annex3 of which contains the outcome of an extensive outreach with public-sector issuers of green bonds with assurance in the EU – accounting for around 90 per cent of total green-bond issuance by the sector and 40 per cent of the EU total by volume. The exercise was managed by EIB and the European Stability Mechanism (ESM) on behalf of the EUPSF.

One of the findings was that UOP green-bond issuance is a ductile means by which public-sector entities can gradually integrate the taxonomy in their operations, building knowledge and data bases that are instrumental to the extension of taxonomy-based mapping to a broader set of the issuers’ activities over time.

An area where this gradual approach is proving particularly useful, Romani adds, is “do no significant harm” and “minimum safeguards” requirements, which – in addition to “substantial contribution” – are also being debated in Australia. “It was clearly stated by the respondents to the EUPSF outreach that these two requirements are more difficult to implement,” Romani comments. “The feedback is that more time is needed for effective project assessment and verification, and that usability issues need to be addressed.”

On this basis, EIB and ESM have been tasked by the EUPSF to elaborate a set of recommendations to assist public-sector issuers outside the scope of EU regulatory requirements to facilitate the application of the wider criteria demanded by the taxonomy and therefore the EU Green Bond Standard.

They will provide a reference framework for issuers to implement recommendations by the European Commission, which has encouraged disclosure – on a voluntary basis and separately from regulatory KPIs, such as the green asset ratio – of “any information in relation to a partial alignment of their exposures with the EU taxonomy”.

If Australian issuers are eventually expected to align their allocations with the do no significant harm and minimum safeguards requirements, Romani explains, the possibility of a step-by-step approach would facilitate buy-in. “This is a topic that is of relevance in Australia and the EU at this point. When the recommendations of the EUPSF are published in 2025, they will provide a useful reference for Australian users as well.”

1 Multi-Jurisdiction Common Ground Taxonomy Towards Interoperability of Taxonomies across EU, China and Singapore: tinyurl.com/taxonomyinterop.
2 See tinyurl.com/marketpractice, page 13.
3 See tinyurl.com/marketpracticeannex, page 176-222.