Produced in partnership with AXA Investment Managers.
In the face of anti-ESG backlash and US President Donald Trump’s policies, AXA IM expects green bond issuance could reach US$600 billion ($966 billion) next year.
The green bond market outperformed the conventional bond market by close to 2 per cent in 2024 and broke new records of issuance, with US$447 billion in 2024, according to data from AXA IM and Bloomberg. This dynamic led the green, social and sustainability (GSS) universe to match its 2021 record of issuance and thus outpace 2023 by 17 per cent.
While the US dynamic is expected to remain muted, projects financed in the US should perdure, we believe there are many reasons to be optimistic about this year.
More issuers and looming refinancing needs
The green bond market is now 10 years beyond the Paris Agreement, which gave a fillip to the market. The 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.
Moreover, while we expect credit to continue to account for more than 50 per cent of the market, we could also 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. Additionally, the EU is a very large green bond issuer with the financing of its projected €250 billion ($422 billion) of green bonds under the NextGen EU by 2026.
New regions
An 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 large US banks are leaving their respective net zero alliances, we do not expect it to derail the green bond market. This is because the market is still largely made up of European issuers, and these banks have not withdrawn from their existing commitments.
Europe’s lead could offset US uncertainties
The euro remained the key driver of growth last year with 60 per cent of issuances. However, there was a decline from US issuers which was only 8.5 per cent (half of what it used to be) and a sharp fall in US dollar-denominated issuances (14 per cent versus 20 per cent last year).
This can be interpreted in different ways. One is the ESG backlash – more issuers stopped issuing green bonds in 2024, highlighting how ESG has fallen out of favour in the US. This might reduce potentially new opportunities, but it is worth noting that sustainable investments continued to grow, boosted by the Inflation Reduction Act. Some US issuers simply don’t want to flag their green investments.
Moreover, USD issuances declined in green bonds but picked up in social and sustainability. It is not just US issuers who issue in USD; emerging markets and Asia in particular do and these issuers seem to embrace larger themes. Chile has historically issued green bonds but currently, also social and sustainability bonds.
Blue bonds and SLLBs
We expect that green bonds will keep the lead in terms of issuance allocation across GSS bonds, but new products might gain interest such as blue bonds (related to marine, ocean or other water-related projects) and sustainability-linked loan financing bond (SLLBs). Other new products 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.
Less confusion and more robust frameworks
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 Taxonomy.
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.
More broadly, and even though regulation is evolving on a positive trend, we still recommend investors to pay attention to the coherence between funded projects and the issuer’s global transition strategy, which are still the minimum safeguards against greenwashing.
Europe could offer the best opportunities
The green bond universe 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 could also benefit 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 US$600 billion threshold next year and US$1 trillion for GSS bonds together.
Overall, we believe the combination of the potentially strong performance, improving regulatory landscape, a supportive macro backdrop, and yield levels close to the 10-year high will offer potentially attractive opportunities for green bonds in 2025.
Johann Plé is a senior portfolio manager in the asset allocation and total return team within the fixed income platform for AXA Investment Managers.
