Investment - Articles - Green bonds set to break new records in 2025

 By Johann Plé, Senior Portfolio Manager at AXA IM

 The green bond market is poised to break new records in 2025 as net zero investment requirements remain massive, according to AXA IM.

 The green bond market outperformed the conventional bond market by close to 2% in 2024 and broke new records of issuance, with $447bn in 20241. This dynamic led the Green, Social and Sustainability (GSS) universe to match its 2021 record of issuance and thus outpace 2023 by 17%2.

 While the US dynamic is expected to remain muted, projects financed in the US should perdure. AXA IM’s Johann Plé, Senior Portfolio Manager believes 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. Now, 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% 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 €250bn of green bond 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 This is because the market is still largely made up of European issuers, and these banks have not withdrawn from their existing commitments.”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% of issuances. However, there was a decline from US issuers which was only 8.5% (half of what it used to be) and a sharp fall in USD-denominated issuances (14% versus 20% last year).3

 “This can be interested 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 also social and sustainability bonds.”

 Blue bonds and SLLBs

 “We expect that green bonds will keep the lead in terms of issuance allocation across Green, Social and Sustainability (GSS) bonds, but 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.”

 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.

 Last month saw an Italian Utility’s inaugural €500m 10-year European Green Bond4, which marked the first issuance of a European Green Bond (EuGB) following the implementation of the EU Green Bond standard in December 2024. The proceeds will fund 100% EU Taxonomy-aligned activities, ensuring stringent sustainability criteria. This EuGB received overwhelming demand which bodes well for the EU Green Bond standard future issuances. However, it's notable that most corporate issuances have seen strong demand this year, leading to the disappearance of new issue premiums.

 The ESMA-supervised external verification system bolsters EuGB issuances’ credibility and integrity and more broadly, the European Green Bond Standard provides a homogenous framework that enhances credibility, transparency and trust in the sustainable fixed-income market, fostering growth and reducing greenwashing risks.

 “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.

 “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.”

 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 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.

 “Overall, we believe the combination of the strong performance, improving regulatory landscape, a supportive macro backdrop, and yield levels close to the 10-year high5 will offer potentially attractive opportunities for green bonds in 2025.”

 1 Source: AXA IM, Bloomberg as of 31st December 2024. Conventional index: Global Broad Index
 2 Source: AXA IM, Bloomberg as of 31st December 2024
 3 Source: AXA IM, Bloomberg as of 31st December 2024
 4 A2A, first european Green Bond placed on the market

 Companies shown are for illustrative purposes only. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

 Glossary

 Green Bonds: Bonds designed to fund projects that have positive environmental impact, e.g., renewable energy, energy efficiency, sustainable waste management, and biodiversity conservation.

 Blue Bonds: Bonds designed to fund projects that support sustainable marine and ocean-based activities, e.g., conservation and sustainable use of marine resources, such as fisheries, coastal habitat protection, and reducing marine pollution.

 SLLBs: Sustainability-Linked Loans and Bonds. Any type of loan or bond where the interest rate, or other loan terms, are directly tied to the borrower’s achievement of predetermined sustainability performance targets.