Unlocking Green Bonds – AFM’s latest views

Counteracting greenwashing is important for all market participants. This applies to issuers, to investors, but also to banks that broker an issue. In order to avoid greenwashing, or on the contrary “green bleaching”, claims regarding ESG properties, goals and/or ESG statistics in legal documents or commercial information must essentially ensure that these expressions correspond to the actual product properties.

In the absence of specific rules or regulations for green bonds in the Prospectus Regulation, the Dutch regulator, the Financial Markets Authority (AFM), recently formulated a set of prospectus oversight expectations to mitigate the risk of greenwashing as much as possible.

While we await the final text on the EU green bond standard, which could come into force as early as the second half of 2024, this guide from the AFM can help both issuers and investors by providing guidance on what is included in prospectuses or other offering documents is all about green bonds.

It is expected that any approval that would be sought from the AFM, as the competent regulatory authority, for a prospectus dealing with the offering of sustainable bonds would only be obtained if the prospectus adequately reflects those expectations of the AFM. Nevertheless, we believe that these recommendations are also useful for offering bonds that may benefit from an exemption under the Prospectus Regulation, either because the offering is only addressed to qualified investors or because the bonds have a minimum denomination of EUR 100,000.

Essentially, these expectations can be seen as a translation of the AFM obligation to include in the prospectus all necessary information that is material for investors to make an informed judgement. For example, issuers should not present themselves as more sustainable than they are. If an issuer presents itself as “sustainable” in the prospectus, the basis for this must be objectively described. In order to make the prospectus easier to understand, “sustainable terms” (including sustainable objectives) must be specifically explained or justified. This applies in particular to concrete sustainability statements. In addition, the use of the proceeds from the issue should be described as specifically as possible in the prospectus. Where a Base Prospectus has been made publicly available for the issue of Notes under a Debt Issuance Scheme and the precise breakdown of proceeds is not specified until the Final Terms, then certain placeholders should be included in the Form of Final Terms section that, in the case of a particular issue, the use of the proceeds will be described in the applicable Final Terms as specifically and concretely as possible. In order to enable investors to assess the sustainability characteristics, the prospectus should contain a description that is as specific as possible of the (intended/intended) effect/reduction prior to issue at individual issue level or, if only a so-called portfolio approach is used in individual cases, at portfolio level instead of at individual issue level.

In addition, it is important that the prospectus clearly describes whether and, if so, which ESG standards have been complied with. According to its recommendations, the AFM expects at least an explanation of the extent to which the topic corresponds to the EU taxonomy regulation. The AFM also expects the prospectus to clearly describe how the bond contributes to the issuer’s sustainability goals and how the issuance fits into the issuer’s broader strategy and objectives. If a proprietary green bond framework is used, its key points should be fully incorporated in the prospectus and the full sources should be incorporated by reference in the prospectus. A similar duty of transparency applies to the way investors can learn about post-issuance information where the issuer intended it to be.

While we await the final text on the EU green bond standard, which could come into force as early as the second half of 2024, the AFM’s guidance above can help both issuers and investors by providing guidance on what should be included in prospectuses or other offerings Documents related to green bonds.