Our EU Sustainability: State of Play series focuses on regulatory developments and policy initiatives emerging from Brussels. In this series, we explore EU sustainability frameworks and their intersection with other areas of EU law.
EU sustainability regulations continue to play a key role in shaping the direction of international ESG frameworks. Latham’s European ESG Practice tracks these EU-driven developments closely by drawing on our connections with EU regulators, our presence in Brussels, and our broader European platform.
The EU’s sustainable finance framework is a comprehensive set of policies and regulations designed to align financial flows with the EU’s climate and sustainability objectives. Central to this framework is the European Green Deal (Green Deal), which sets the goal of EU climate neutrality by 2050, as anchored in the EU Climate Law. The “Fit for 55” package advances these efforts by targeting a 55% reduction in greenhouse gas emissions by 2030. In anticipation of the Green Deal, in March 2018, the European Commission (Commission) announced its Sustainable Finance Action Plan, a renewed sustainable finance strategy for the implementation of actions to foster financing of sustainable growth.
As part of the key actions under the Sustainable Finance Action Plan, the Commission committed to (i) establishing a clear and detailed EU taxonomy, a classification system for sustainable activities, and (ii) creating an EU Green Bond Standard (EU GBS) and labels for green financial products. These actions underpinned the sustainable finance framework designed to reorient capital flows towards a more sustainable, low-carbon economy within the EU and to incorporate ESG factors into investment decision-making, resulting in the adoption of the EU Taxonomy Regulation and EU GBS by the European Parliament and the Council. While ongoing inter-institutional “Omnibus” negotiations on certain other sustainability frameworks flowing from the Sustainable Finance Action Plan are reshaping and pushing back the implementation of ESG-related obligations under the EU Corporate Sustainability Reporting Directive and the EU Corporate Sustainability Due Diligence Directive (see this Latham article), the sustainable finance landscape remains on firmer footing.
Beyond the EU’s institutional triangle, other European institutions have also advanced the EU’s sustainable finance agenda. The European Central Bank (ECB) has integrated climate change considerations into its monetary policy framework and supervisory regime, emphasizing the importance of sustainable finance and green investments, thereby aiming to enhance the resilience of the financial system to climate-related risks and supporting the transition to a low-carbon economy. In a similar vein, the European Investment Bank (EIB) announced in 2020 its Climate Bank Roadmap 2021-2025 as a strategy to support the Green Deal by channeling finance towards climate and environmental goals, and committed to support €1 trillion of green investment by 2030 and align its new operations with the Paris Agreement.
This article first gives an overview of certain key concepts relevant to European sustainable finance. It then examines the EU Taxonomy and the EU GBS as foundational EU sustainable regulatory frameworks and discusses certain other sustainable finance standards commonly used by European issuers. Finally, the article provides insights into the EU’s approach to addressing certain challenges in the sustainable finance space, other notable EU sustainable finance developments, and an outlook for the future.
Use of proceeds instruments are sustainable finance instruments designed to raise capital for projects with a positive environmental or social impact, and the net proceeds are used to finance or refinance eligible projects or assets.
Green, social, or sustainability bonds and loans focus on the use of proceeds, not necessarily on the company’s green credentials or corporate-level targets. A company must: (i) use the net proceeds of a green bond for eligible green projects (i.e., green bonds constrain the use of proceeds), and, therefore, (ii) have sufficient green expenditure within a relevant time period.However, these requirements may be challenging for certain companies, in particular when issuing bonds given the commercial limitations on the minimum viable size of a public bond. So-called “sustainability bonds” allow the proceeds to be use for a combination of social and green projects.
However, in order to label an instrument a green or social bond, it must comply with standards set on the international or regional level. In Europe, the most commonly used standards for use of proceeds bonds are the Green Bond Principles 2025https://www.icmagroup.org/sustainable-finance/the-principles-guidelines-and-handbooks/green-bond-principles-gbp/. (GBPs), the Social Bond Principles 2025,https://www.icmagroup.org/sustainable-finance/the-principles-guidelines-and-handbooks/social-bond-principles-sbp/. the Sustainability Bond Guidelines 2021,https://www.icmagroup.org/sustainable-finance/the-principles-guidelines-and-handbooks/sustainability-bond-guidelines-sbg/. each promulgated by the International Capital Markets Association (ICMA), the Climate Bonds Standard by the Climate Bonds Initiative, as well as the EU GBS, the EU’s flagship standards for green bonds. The most commonly used standards for sustainability loans are the Green Loan Principleshttps://www.lsta.org/content/green-loan-principles/ (GLPs) and the Social Loan Principles,https://www.lsta.org/content/social-loan-principles-slp/ each promulgated by the Loan Market Association (LMA), the Asia Pacific Loan Market Association, and the Loans Syndications and Trading Association (LSTA). The ICMA and LMA principles provide guidelines and recommendations for issuing, managing, and reporting on these sustainable finance instruments.
Target-linked sustainable finance instruments are directly linked to specific sustainability targets, such as reducing greenhouse gas emissions or increasing access to clean water.
In Europe, sustainability-linked bonds (SLBs) and sustainability-linked loans (SLLs) are target-linked instruments structured in accordance with the ICMA Sustainability-Linked Bond Principles (SLBPs) or the LMA Sustainability-Linked Loan Principles (SLLPs). SLBs and SLLs focus on the key performance indicators (KPIs) and the sustainability performance targets (SPTs) set by the company, respectively, rather than the use of proceeds or the green credentials of the issuer or borrower. With respect to SLLs, companies do not need to have any green expenditure and can generally use the proceeds for general corporate purposes so long as they are meeting their KPIs and SPTs. Consequently, SLBs and SLLs may be more suitable than use of proceeds instruments for companies that seek to finance a transition strategy but do not have anticipated pure green expenditures sufficient to justify a public green bond or green loan.
Transition financing is a specific financing method designed to support companies and sectors that are committed to reducing their environmental impact and aligning with climate goals. “Transition bonds” are a key instrument in this space, enabling issuers in carbon-intensive or hard-to-abate sectors to raise capital for activities that facilitate their shift towards lower emissions and more sustainable operations. These bonds can be structured either as use of proceeds instruments or target-based instruments, where the financial terms are linked to the issuer’s achievement of its transition pathway. The flexibility of these transition bonds can allow a broader range of issuers to access sustainable finance markets.
On 18 June 2020, the EU adopted the Regulation on the Establishment of a Framework to Facilitate Sustainable Investment (EU Taxonomy). The EU Taxonomy is a classification system for identifying which economic activities are environmentally sustainable. To be classified as sustainable under the EU Taxonomy, an activity must meet four key requirements: (i) make a substantial contribution to at least one of six environmental objectives — climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, or protection and restoration of biodiversity and ecosystems; (ii) do no significant harm (DNSH) to any of the other objectives; (iii) comply with minimum social safeguards; and (iv) satisfy detailed technical screening criteria (TSC) set out in various delegated acts.
The TSC are established for each of the six environmental objectives. The criteria are both general and sector-specific, often including quantitative thresholds (such as emissions limits) and qualitative requirements (such as adherence to best practices or regulatory standards). The TSC are regularly reviewed and updated to reflect technological advances and evolving policy objectives. This approach seeks to ensure that only activities with robust, science-based environmental performance are recognized and to provide clarity for investors and companies that wish to support the EU’s transition to a more sustainable economy.
On 25 February 2025, the Commission launched its first Omnibus package on sustainability (the Omnibus). The Omnibus contains a set of proposals designed to streamline certain sustainability frameworks, including proposals to amend the Taxonomy Disclosures Delegated Act and the Taxonomy Climate and Environmental Delegated Act. Notable updates from the Commission’s proposal include exempting activities that account for less than 10% of turnover from detailed reporting requirements, streamlining reporting templates, and simplifying the DNSH criteria to enhance usability across sectors.
These changes were adopted by the Commission on 4 July 2025 and are currently under scrutiny by the Parliament and the Council. For more information on the Omnibus with regard to the EU Taxonomy, see this Latham article.
The EU GBS has been promoted by the EU as a new “gold standard” for green bonds, underscoring the EU’s leadership ambition in the area of sustainable finance. It has been much anticipated in Europe, having been announced in concept by the Commission in its 2018 Sustainable Finance Action Plan and again on 14 January 2020 as part of the Green Deal Investment Plan.Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee, and the Committee of the Regions, Sustainable Investment Plan, European Green Deal Investment Plan (COM/2020/21 final) (https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:52020DC0021 ). The Commission then tabled a proposed standard on 6 July 2021,Proposal for a Regulation of the European Parliament and of the Council on European green bonds (COM/2021/391 final) (https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:52021PC0391) (Commission Proposal). setting out requirements for environmentally sustainable bonds marketed in the EU’s as “European green bonds” (EuGB). On 22 November 2023, the EU GBS became embedded into EU law pursuant to the adoption by the Parliament and the Council of the Regulation on European Green Bonds and Optional disclosures for Bonds Marketed as Environmentally Sustainable and for Sustainability-linked Bonds.
In essence, the EU GBS requires that all bond net proceeds are allocated in alignment with the EU Taxonomy and that EuGBs are subject to supervision by competent authorities under the EU prospectus regulation (the EU Prospectus Regulation).Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC.
The ICMA SLBPs and the LMA SLLPs mirror each other and have substantially the same requirements. In order to comply with the requirements of the SLBPs or the SLLPs, the instrument must comply with the following five core components:
Selection of KPIs
KPIs should be (i) “relevant, core and material” to the issuer’s overall business and of high strategic significance; (ii) measurable; (iii) externally verifiable; and (iv) able to be benchmarked, ideally based on historically, externally verified KPI values for at least the last three years. Importantly, the relevance and materiality of KPIs will vary by sector and business model. There can be any number of KPIs and they can relate to a variety of (environmental-, social-, and/or governance-related) sustainability factors.
SPTs should be “ambitious”, i.e., (i) represent a material improvement and avoid a “business as usual” trajectory; (ii) referenced to a benchmark or external reference, such as the issuer’s historic performance, peers, and/or science-based targets; and (iii) be consistent with the issuer’s sustainability strategy. Calibration also requires identification of an SPT test date and disclosure of a verified baseline against which the SPTs are set in the bond offering or loan documentation. Additionally, the issuer or borrower, respectively, should disclose any recalculation policy (under which the KPIs and/or SPTs and/or the underlying baseline may be recalculated during the term of the instrument, e.g., in the event of a significant change to the group perimeter, including as a result of an acquisition or divestiture). Under the SLBPs, the issuer should also disclose an explanation of how the issuer intends to achieve the SPTs.
SPT Calibration
A key characteristic of the bond or loan must vary depending on whether the issuer achieves the SPTs. A step-up in the coupon is the most commonly used bond characteristic, in which case the quantum of the step-up should be “meaningful”, although alternatives to the coupon step-up may include a redemption premium/penalty, optional/mandatory redemption, and additional ESG information and disclosure requirements. On the loan side, a failure to meet the SPT typically results in an increase to the applicable margin.
Bond Characteristic(s)
A key characteristic of the bond must vary depending on whether the issuer achieves the SPTs. A step-up in the coupon is the most commonly used bond characteristic, in which case the quantum of the step-up should be “meaningful”, although alternatives to the coupon step-up may include a redemption premium/penalty, dividend basket availability, optional/mandatory redemption, and additional ESG information and disclosure requirements.
Reporting
The issuer should prepare and publish an annual assurance report disclosing performance against the SPTs.
Verification
The issuer must obtain a post-issuance verification of its performance level against the SPTs on an annual basis.
The ICMA GBPs and, similarly, the LMA GLPs, require four core components:
The GBPs and the GLPs also recommend setting up a financing framework and external review confirming alignment of the instrument or the applicable framework with the requirements of the GBPs and GLPs.
Increased scrutiny and allegations of “greenwashing” have prompted a strong emphasis on ensuring that sustainable finance instruments use “best-in-class” structures. Certain green bonds have attracted criticism for financing projects that do not align with their intended environmental impact (and/or that may cause social damage or inequity). Furthermore, there is currently no precise definition under the GBP or GLP for eligible “green” projects. GBPs and GLPs only contain an indicative and high-level list of “eligible Green Project categories”.
With respect to sustainability-linked products, various high-profile SLB issuers have attracted criticism for the perceived lack of ambition of their SPTs or transition strategy. Other common SLB features that attract significant criticism are: (i) coupon step-up or margin increase is not meaningful enough, (ii) SPT test date does not fall prior to the bond’s par-call date ( meaning even if the SPT was not achieved, the issuer could call the SLB at par before any coupon step-up could come into effect), (iii) SPTs are not benchmarked against international targets, or (iv) SPTs generally lack ambition.
The EU GBS is intended to mitigate the risks of ambiguity and greenwashing in sustainable finance by providing a clear and legally binding framework for defining what constitutes a green activity, by way of linking the use of the proceeds to the EU Taxonomy. Unlike the GBPs or GLPs, the EU Taxonomy offers precise, science-based criteria for environmental sustainability, ensuring that only activities with a substantial positive impact are classified as green. Such clarity is crucial for investors seeking to make informed investment decisions into sustainable finance, as it enhances legal certainty and investor confidence.
The voluntary disclosure templates for SLB issuers also have a link to the EU Taxonomy as they require the company to disclose the environmental objectives under the EU Taxonomy pursued by the SLB. By linking the voluntary disclosure templates at least partly to the EU Taxonomy, issuers making use of these templates would be required to provide information on how their financing aligns with the EU’s environmental goals, which could reduce greenwashing concerns. This structured approach has the potential to support market integrity and to foster trust in the sustainable finance sector in the EU.
However, so far, only a relatively small number of EuGBs have been issued and the label is primarily used by utilities, (quasi-)sovereigns, development banks, and financial institutions based in the EU. The extent to which companies in other sectors will adopt the EU GBS or continue to rely on the widely accepted GBPs remains uncertain and will largely depend on investor requirements. Currently, the ICMA labelled green bonds are still the common instrument, both for European and non-European issuers transacting in the European market, and time will tell whether the EU GBS will ultimately establish itself as the gold standard for green bonds and whether the voluntary disclosure templates introduced by the EU GBS may also become an expected disclosure “add on” for ICMA SLBs.
Other recent notable developments include:
The EU’s sustainable finance architecture continues to mature, anchoring capital markets to the Green Deal through clearer definitions, stronger disclosures, and targeted supervision. The EU Taxonomy and the EU Green Bond Standard aim to channel proceeds into sustainable activities, while optional templates for other green and sustainability‑linked instruments seek to enhance comparability and deter greenwashing. Together, these measures are designed with the aim to boost transparency, investor confidence, and market integrity.
However, certain complexities remain. The current requirements for Taxonomy alignment and the EU GBS supervisory regime may increase implementation challenges, and market adoption outside utilities, (quasi-)sovereigns, development banks, and financial institutions remains limited compared with established ICMA and LMA frameworks. Further, the articulation and benchmarking against the TSC as well as compliance with the DNSH requirement is often deemed complex, particularly given the evolving nature of the standards and inconsistencies in available information (which may increase given the delayed rollout of the EU Corporate Sustainability Reporting Directive), and results in intricate legal questions for issuers and investors. Sustainability-linked products are subject to ongoing assessment regarding KPI selection and target ambition, and recent cases where issuers have not met their goals, in particular in energy and decarbonization due to geopolitical and market challenges, raises further challenges, in particular as standards and investor expectations continue to shift and evolve.
For issuers and lenders, this landscape requires consideration of various options and ongoing preparation. Selecting between use-of-proceeds and target-linked structures, mapping activities to the EU Taxonomy, preparing Capex plans and impact reporting, and obtaining external reviews are now common aspects of implementation. Ongoing observation of changes to EU templates, supervisory practices, and investor preferences may support continued access to sustainable capital and the effective communication of transition strategies.
This article was prepared with assistance from Samantha Banfield at Latham & Watkins.
Latham’s European Sustainable Finance and ESG practices have experience advising on a broad range of EU sustainability and global ESG topics. If you have questions about this article, please contact one of the authors listed below or the Latham lawyer with whom you normally consult.