The good, the bad, the opportunities: green bonds in 2025

Calendar year 2024 was another strong year for Green Bonds. It outperformed the conventional bond market by close to 2%¹  and broke new records of issuance. While issuance is still mainly in EUR, we believe this sets the green bond market up well for 2025. Europe’s trajectory of rate cuts offers more scope for opportunities in fixed income, and thus green bonds, compared to the US.

TIn 2024, the green bond market outperformed the conventional bond market for the second year in a row (this has been the case in six of the past eight calendar years)¹. Alongside this, the green bond market also broke new records of issuance with $447bn in 2024². This dynamic has led the Green, Social and Sustainability (GSS) universe to match its 2021 record of issuance and thus outpace 2023 by 17%² .

Credit accounted for 52% of issuances for 2024, equally split between financials, utilities, and industrials. Other sectors of note were auto, which accounted for 7%, and Real Estate, whose 6.5% of issuance shows signs of recovery after a muted 2023 due to weaker fundamentals².

Sovereigns enjoyed a strong momentum, accounting for 28% of issuances, reflecting the strong dynamic among European countries (most of which are already issuing  green bonds) but also new issuers such as Australia².

The euro remained the key driver of growth with 60% of issuances while Emerging Markets (‘EM’) declined from 10.4% to 6.5%². Of particular significance is the decline in issuances from US issuers which was only 8.5% (half of what it used to be) and led a sharp decline in USD-denominated issuances (14% versus 20% last year).²

What the impact of Trump could mean

The decline in USD issuances in green bonds can be interpreted in different ways:

• Backlash to ESG in the US: There has been an increase in the number of existing issuers who have stopped issuing green bonds in 2024, highlighting how ESG has fallen out of favour in the US. This might reduce new opportunities within the US Green segment, however, it is worth noting that sustainable investments continued to grow, boosted by the Inflation Reduction Act. US issuers simply don’t want to flag their green investments.
• Issuers looking more broadly: USD issuances declined in green but picked up in social and sustainability. It is not just US issuers who issue in USD; EM and Asia in particular do and these issuers seem to embrace larger themes. A good example is Chile which has historically issued green bonds but also social and sustainability bonds.

This dynamic continued to alleviate the past scarcity of issuance the market had experienced in some segments which created a ‘greenium’. This premium to pay to gain green exposure compared to conventional bond has vanished in 2024, averaging to barely 1 basis point at the end of the year in the EUR Green market.

A changing, more regulated landscape

The transparency and robustness of frameworks guiding GSS bond issuances have seen significant improvements, with multiple framework updates over the past two years, enhancing the credibility of these bonds. These new frameworks reinforce the transparency, reporting, and verification commitments. They also broaden the scope of eligible categories, and sometimes add a layer of criteria selection such as the EU Taxonomy³ .

Of course, it needs to be noted that while the EU Taxonomy is increasingly integrated by issuers into their frameworks, it is still a long and complex regulation. For some issuers, it might be difficult to show compliance with some criteria and may take some time before issuers fully assimilate this new standard.

Nevertheless, the adoption of more standardised frameworks is contributing to overall improvements in environmental outcomes. We are seeing issuers increasingly committing to measurable environmental impacts, such as reductions in greenhouse gas emissions or enhancements in biodiversity. There is also a growing trend towards integrating social considerations alongside environmental ones within sustainability frameworks, promoting a more holistic approach to financing.

We believe the confusion that regulation may have induced over the past years should progressively dissipate to leave a more robust and credible GSS market but also more accessible to less-experienced investors.

Outlook

Looking at 2025, we believe this new year should again be promising and break new records as net zero investment requirements remain massive. Indeed, there are plenty of reasons to be optimistic about this year:

Firstly, the green bond market is now 10 years beyond the Paris Agreement which gave a fillip to the market and first issuances are progressively reaching maturity. This maturity wall will start to hit new levels in 2025 and 2026 which means there will be refinancing needs on top of regular issuance ambitions.

Secondly, hierarchy should remain relatively unchanged with domination from Europe and EUR denominated issuances. We also expect that credit will continue to account for more than 50% with the potential for growth in industrials sectors.

Within sovereigns we could expect additional sovereigns issuing green bonds. In Europe only Finland, Portugal and Greece have not issued any green debts but Greece has referred to it as a potential instrument in its 2025 funding plan. In addition to European sovereign issuances, the EU as a whole remains a very large green bond issuer with the financing of its projected €250bn of green bond under the NextGen EU by 2026.

Another interesting area of development is Asia, which could become a robust source of growth after Europe. The growing sophistication in sustainable finance, supported by maturing regulation and government support could lead to additional supply in the region but also growing investors’ appetite.

While we expect the US dynamic to remain muted, we are confident the projects financed in the US should perdure as most beneficiaries of the Inflation Reduction Act funding are Republican states. It is also worth noting that while several of the largest US banks are leaving their respective net zero alliances, we do not expect it to derail the green bond market. This is because this change of approach is mostly contained to the US, while the green bond market is still largely made up of European issuers, and these banks have not withdrawn from their existing commitments.

We expect that green bonds will keep the lead in terms of issuance allocation across GSS, however, new products might gain interest such as blue bonds (related to marine, ocean or other water-related projects) and SLLBs (Sustainability-Linked Loan Financing Bond). While others might start to emerge such as green-enabling bonds (funding of projects necessary for an enabled Green Project’s value chain to be developed). Indeed, the labelled bond market is continuing to evolve, across regions and sectors.

Opportunities for 2025

We feel the performance of green bonds versus the global broad market reflects the opportunities that the characteristics of the green bond universe may offer:

• It is more exposed to Europe where the macroeconomic context is supportive of further rates cuts by the European Central Bank compared with the US which is facing more uncertainties.
• The green bond market also benefits from a higher credit exposure which currently provide additional yield pickup as well as healthy fundamentals.

This should be good for technicals and we forecast the green bond issuance levels being closer to the $600bn threshold next year and $1000tn for GSS bonds together. The trend of falling interest rates and healthy corporate fundamentals, especially in Europe, is likely to continue into 2025, which should boost demand for the asset class next year.

Overall, we believe the combination of the strong performance, improving regulatory landscape, a supportive macro backdrop, and yield levels close to the 10-year high⁴  will offer attractive opportunities for green bonds in 2025.