(Bloomberg) -- A proposed European Union standard for green bonds that’s designed to align investment with the bloc’s climate goals probably will fall flat without additional incentives for issuers, according to the bank that pioneered the instruments.

Christopher Flensborg, head of sustainable finance at Stockholm-based SEB AB, says meeting the requirements set forth in the EU’s rulebook creates additional risks for which companies won’t be compensated. That’ll make sticking with other existing global frameworks more attractive. 

Complying “will make your work and your potential liability much larger,” Flensborg said. “They need to provide some kind of carrot to go the extra distance,” he said, adding possible incentives could involve tax or capital ratios.

After years of work, the European Commission published in July a proposed standard for green bonds, with the goal of creating greater uniformity in the market as the bloc gets ready to become the world’s largest issuer. Investors have been dealing with a smorgasbord of different debt types and voluntary rules, creating concerns about potential greenwashing as sales exploded this year.

The EU proposal requires bond proceeds be invested in economic activities that are aligned with its classification of sustainable business, with the EU hoping that becomes a “gold standard” for a global ethical debt market now worth over $3 trillion.

But there exist other green bond programs that investors have widely accepted, such as voluntary principles from the International Capital Market Association. These offer an alternative to the EU if complying proves too onerous and the risk of failing to deliver too great, Flensborg says.

“If you don’t deliver, what’s going to happen?” he said. With fines and reputational damage the cost of failing to keep up with requirements, issuers are likely to forgo the standard, he said.

SEB helped pioneer the green bond market more than a decade ago, when the Stockholm-based lender arranged the first deal between Swedish investors and the World Bank. It’s not alone in worrying the EU’s standards might be too stringent. 

The ICMA also said the lack of flexibility in aligning with the EU’s taxonomy might deter borrowers. Others, including HSBC Holdings Plc strategist Dominic Kini, say it shouldn’t be too difficult for current issuers of green bonds to comply. One potential incentive is speculation that EU-aligned green bonds will trade at a premium, marginally reducing borrowing costs, if firms can go through the process.

“If you have to be 100% aligned to be an EU green bond, it will reduce the universe quite a bit,” Flensborg said. “You need to show alignment in the portfolio and you need to be 100% aligned in the bond, and that 100% alignment is a risk factor because that is pretty tough.”

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