At the end of March, ESMA launched a first consultation on technical standards for the registration and supervision of independent External Reviewers in the context of the European Green Bond (EuGB) Regulation (see also TSI kompakt of 5 October 2023). The EuGB Regulation will take effect from 21 December 2024, by which time the legal framework for External Reviewers should be in place for the subsequent 18-month transition period until “full registration”.
ESMA is planning a further consultation for Q1 2025, which is expected to cover the outstanding technical standards for External Reviewers, e.g. requirements for the permanent, independent and effective compliance function for the activities performed by the External Reviewer, for internal policies and procedures as well as assessment methodologies.
All relevant stakeholders are invited to comment as part of this consultation. In particular, ESMA is addressing those market actors and service providers who intend to apply for registration as External Reviewers, second party opinion (SPO) providers, issuers, association organisations and financial market participants who have issued or intend to invest in green bonds or sustainability-linked bonds.
According to ESMA, the aim of the consultation is to ensure that the technical standards are sufficiently tailored to market reality.
What is the role of an External Reviewer in the context of the EuGB Regulation?
The function of an External Reviewer in the context of pre- or post-issuance reviews and the review of impact reports for the issuance of an EuGB bond is outlined in Annex IV of the EuGB Regulation. Accordingly, External Reviewers prepare opinions on the basis of information provided by the issuer.
As part of a pre-issuance review, a detailed assessment is carried out in advance to prove that a bond issue – including public ABS – fulfils the requirements of the EuGB Regulation with regard to the Taxonomy Regulation. The focus here is on the European Green Bond Factsheet, which supplements a prospectus. An opinion from the External Reviewer must validate this assessment. This step of the review process on the intended use of proceeds at least partially covers the role of second party opinions (SPOs).
As part of a post-issuance review based on annual allocation reports, a detailed assessment must be available as to whether the issuer’s use of proceeds – in the case of public ABS, the originator’s use of proceeds – complies with the relevant requirements of the EuGB Regulation and the information in the fact sheet. Again, the opinions of the External Reviewer refer to this assessment.
The review of impact reports of issuers of European green bonds is optional. If an issuer or originator opts for this, the review follows the pattern of assessments and opinions in pre- and post-issuance review.
In our view, it remains to be seen how potential service providers of the issuer/originator for assessments and the related opinions of the mandatory External Reviewer will position themselves on the market and what role SPOs will play in the future. With regard to the function of an External Reviewer, it is of central importance from the perspective of the European legislators that its independence is guaranteed in the performance of its services.
Details of the consultation
In connection with the drafts submitted, ESMA is endeavouring to strengthen the independence of the External Reviewer through various governance requirements relating to its function. ESMA intends to specify the registration requirements in such a way as to ensure low market access costs and effective competition for potential External Reviewers .
The consultation comprises five draft technical standards (RTS/ITS) for the registration of External Reviewers:
- Senior management and members of the board as well as analysts, employees and other persons directly involved in the valuation activities
- Sound and prudent management and management of conflicts of interest
- Knowledge and experience of analysts
- Outsourcing of assessment activities
- Forms, templates and procedures for providing registration information
With regard to the costs, ESMA emphasises that, although it cannot provide a quantitative assessment of the associated costs, the technical standards are concretisations of the EuGB Regulation and not additional requirements, meaning that no substantial additional costs are to be expected. Nevertheless, it must be assumed that the detailed regulation of the EuGB will be accompanied by not insignificant costs for potential issuers.
Consultation period
ESMA welcomes feedback on the appropriateness of the proposed technical standards to supplement the EuGB Regulation. Comments can be submitted until 14 June 2024. The TSI is evaluating possible participation in the consultation with relevant stakeholders.
EuGB Regulation in the Official Journal of the European Union