In April 2020 the AFM published a report on the market for sustainable bonds in the Netherlands. The aim of this report is to gain insight into this market and to identify risks the AFM could take into account in its supervision. The report is based on interviews with prominent market participants as well as a comprehensive analysis of data and desk research. The main conclusions from the report are as follows.
The AFM expects that the sustainable bond market will continue to grow rapidly
The sustainable bond market in the Netherlands is growing at a high rate, doubling in size in 2019 and thus placing the Netherlands as the third largest sustainable bond market in Europe. The AFM expects the market to continue to grow. The driving forces behind the growth are the transition into a sustainable economy and the large investments needed to achieve this1, an increasing demand from (institutional) investors and an increased popularity of sustainable bonds under companies to show responsible behaviour.
More transparency and standardization would be beneficial for this market
The AFM seeks to achieve more transparency, both at the origination and during the term of a bond. Further, there is not yet an agreed upon, uniform and mandatory standard that a sustainable bond has to meet. Voluntary frameworks are in place, but these serve different purposes and differ greatly in substance. In particular they diverge regarding the taxonomies or key performance indicators applied.
The apparent risk of greenwashing can be mitigated by defining clear and objective criteria to classify and rate sustainable bonds. Current EU proposals aim to do so. For example the EU Green Bond Standard (EU-GBS), in combination with disclosure of alignment with the proposed EU taxonomy are expected to help stimulate the market and simultaneously mitigate the risk of greenwashing. Further, AFM expects transparency regarding ESG ratings will become more and more relevant.
Implications for AFM supervision
As a result of these conclusions, the AFM will be striving for more transparency in prospectuses, for example regarding information on earnings, allocation of funds and impact reporting.
The AFM will further supervise non-financial information in management reports and encourages (honest and transparent) integrated reporting. AFM’s supervision on market abuse will continue to focus on disclosure of inside information at the appropriate time, including changing sustainability characteristics of an issuer. Lastly, AFM will continue to keep track of new regulatory developments and keep an open dialogue with market participants.
1 The European Commission estimates in the European Green Deal that an additional investment of €260bn per year is required, a sizeable part of this €260bn is expected to be financed with bonds.