The sustainable finance market has the potential to be a transformative source of capital, one that is critical for scaling and supporting the net-zero transition.
Despite economic instability and geopolitical tensions, the sustainable debt market has shown resilience in volatile markets and the potential to outperform during the recovery phase.i The Climate Bonds aligned GSS+ global market is close to reaching the USD6tn milestone and issuers and investors continue to look towards the sustainable finance market to create and fund long-term value creation.
Climate Bonds latest Sustainable Debt Global State of the Market 2024 report analyses the size and shape of the market in 2024, across green, social, sustainability and sustainability-linked bonds (SLBs) collectively known as GSS+ bonds. While the report covers what has happened this article looks at what may lie ahead. This article briefly explores five key trends that could shape issuance trends in the coming year and potentially beyond.
The 5 trends
1. Government defence spending and energy security
In the current turbulent geopolitical context, governments are focusing on national security.
Many governments, including the UK and Japan, have announced intentions to increasing defence spending. ii, iii Energy security is top of the agenda, as evidenced by China’s new energy law, President Trump’s American energy executive order and the UK’s energy policy all of which prioritise the security of supply and domestic production. This increased spending offers an opportunity to governments to use sustainable finance to channel public spending into areas that improve long-term resilience as well as shoring up short-term security priorities.
For example, investing in domestic renewable energy and grid infrastructure improves energy security by reducing reliance on imported supply which can be unpredictable and volatile. Defence can represent a large proportion of central government emissions, for example in the UK it accounts for up to 50%. Meanwhile, public procurement in this sector could be a powerful tool to grow nascent and strategic industries like green steel and synthetic aviation fuels.
Accessing the green bond market also represents an effective source of finance to lighten pressure on already stretched government budgets.
2. Re-issuance of maturing bonds
The GSS+ bond market is reaching a coming-of-age moment in that many bonds are approaching their scheduled maturity date. Climate Bonds analysis finds that 40-48% of the existing aligned GSS+ bonds are set to mature between 2025-2030. The ongoing demand/supply imbalance continues to benefit green bond issuers, an obvious refinancing route would be to return to the sustainable finance debt market.
Taking this a step further, this may present an opportunity for governments to align the re-issuance, or expansion, of their sovereign bond programmes with their national energy strategies and Nationally Determined Contributions (NDCs) which are due to be updated by the end of 2025 under the Paris Agreement.viii GSS+ bonds are an effective way of financing the green infrastructure needed to implement the NDCs, especially when general public spending is under pressure.
3. Scaling sustainability-linked bonds
SLBs are by far the smallest thematic label, making up less than 1% of the overall aligned GSS+ volume priced in 2024.
As the market is still evolving, there is considerable potential for growth and development and an opportunity for governments to lead the way by issuing sovereign SLBs that align with the targets of their NDCs. This could deliver several benefits, including: signalling commitment and strengthening their national climate ambition, providing much-needed finance to implement the NDCs, and helping to grow the market for SLBs by demonstrating a pathway for the private sector to follow while increasing investors’ confidence in the label. This approach could be particularly valuable for countries that struggle to raise capital in the traditional debt market.
For example, the Thai government issued the first sovereign SLB in Asia in 2024, raising USD868m tied to two targets: a reduction in the nation’s total GHG emissions (with some exclusions) by 30% versus the baseline scenario by 2030, and increasing the number of zero-emission vehicles registered by 476% by 2030. The coupon adjustment will be triggered by meeting or missing these targets, the step-up/step-down feature incentivises the issuer to meet the specified targets. This along with a planned sovereign SLB from Slovenia may be the impetus required by other governments to follow suit.
4. Integrating adaptation & resilience
As the impacts of climate change are increasingly causing disruption to people, ecosystems and economies, there is a growing recognition of the importance of Adaptation and Resilience (A&R).
While investor demand to support funding in areas relating to A&R exists, a lack of clear definitions around what constitute genuine and credible A&R investments has hampered the identification of appropriate financing opportunities. While Climate Bonds is not suggesting the requirement for a new and separate label, there is a need for A&R related projects and the resulting allocations of funds to be clearly identified.
To support this, the Climate Bonds Resilience Taxonomy (CBRT) was published in 2024, the CBRT defines and categorises A&R activities into seven climate resilience themes illustrating examples of which sectors and subsectors might fall under each theme offering a guide for issuers and investors.
Climate Bonds also works as a technical partner to governments developing national taxonomies. For example, the Brazilian Sustainable Taxonomy, which will be published in the second half of this year, covers climate mitigation, adaptation, and the sustainable management of the nation’s rich forests.
5. Increased demand for credibility in transition plans
There is increasing demand for external, independent validation of climate transition plans to improve transparency and credibility.
Climate Bonds assesses the transition finance frameworks of financial institutions, either at the corporate level or via their investment portfolio. This work is led by Climate Bonds Capacity Building and Technical Assistance team along with the Market Research team. Alongside the growing demand for Climate Bonds certification of GSS+ bonds, which grew by 42% in 2024, this shows a trend for increased demand for transparency, validation, and credibility in the sustainable finance market.
Issuers are eager to enhance and support their credibility to attract investment, while investors are increasingly demanding robust standards to guard against greenwashing and validate their sustainability claims.
Final thoughts
There has been a noticeable rise in catastrophic climate related events; 2024 was the warmest year on record and the first year that the average temperature breached 1.5°C above the pre-industrial level, additionally ghg emissions are still rising.xi At least USD3tn a year is needed to reshape economies and address climate impacts, according to the U.S. Treasury. Public spending cannot cover this alone, especially as governments face increasing fiscal pressures while negotiating an unstable geopolitical environment.
Scaling up the sustainable debt market is critical to addressing the climate crisis and building a resilient economy. For investors, the GSS+ bond market represents a multi-trillion USD investment opportunity with comparably resilient returns and an opportunity for positive impact. For issuers, they are an effective, tried and tested source of finance to achieve climate and sustainability targets while diversifying their investor base. And for governments, sustainable debt is not only a financial tool but an effective policy lever that can be used to strengthen NDCs and energy security strategies while growing strategic industries. Governments are well-positioned to act as first-movers, using sovereign bonds to unlock private sector investment at scale, as seen by the almost 60 sovereigns that had deployed this strategy by year-end 2024.
The sustainable debt market has expanded dramatically in the last ten years, and it continues to grow even in the face of the economic turbulence. That said, there is still enormous untapped potential for the market, with aligned cumulative figures representing just 4% of a growing global debt market as of year-end 2024.
Hopefully the many financing solutions presented by the GSS+ bond market will encourage issuers to seize the opportunity to direct capital towards climate transition and resilience.
For more in-depth analysis on some of the topics covered above, download our Sustainable Debt Global State of the Market 2024 report.
