Marcus Pratsch, head of sustainable bonds & finance at DZ BANK, considers the outlook for sustainable bonds in 2025 and some of the main themes for the year ahead.
For a long time, the sustainable bond market knew only one direction: always forward, never back. In 2020 and 2022, it suddenly faced its first major challenges: Covid-19 and a new geopolitical reality, coupled with many economic obstacles. This was seen as a sword of Damocles by many detractors.
However, the relatively young market has defied its critics and mastered these uncertain times with flying colours. At the epicentre of a pandemic, it fought his way back to new heights. And its response to the new geopolitical and economic world has been one of qualitative growth.
In this area of turbulences, how is the sustainable bond market reacting? As a result, the volume of new sustainable bond issuance in the first four weeks of the year was down by around 15% year-on-year. However, from our perspective, there is no reason to bury our heads in the sand. In the medium-to-long term, the opportunities outweigh the risks. And the market is also experiencing enough tailwind to avoid going off track in the future. Given the global nature of the sustainability movement, capital markets will continue to respond to real-world challenges beyond the politics of Washington DC. We believe that despite, or perhaps because of, the changing political landscape and the backlash against sustainable finance, investing in sustainable bonds remains attractive for investors on the international stage seeking long-term value creation.
Don't worry – be optimistic!
While the debate on sustainable bonds may focus on challenges and risks in the short term, and voices critical of sustainable finance/ESG may be raised in some parts of the world, we should instead devote ourselves to the many, many opportunities that the market offers.
COP30 will be a "COP of transition plans of sovereigns." As governments around the globe have already started to prepare their next round of nationally determined contributions (NDCs), sustainable bonds by sovereign issuers will be an important catalyst for accelerating future market development. And investor appetite for sovereign sustainable bonds remains strong. With first-time issuers in the starting blocks and established issuers, particularly from Europe, expanding their sustainable finance activities, we could see new record levels. A look at the figures reveals great potential. There are about 170 countries that issue sovereign debt, and so far, only about 60 of them have come to the market with a sustainable bond. So, there are still many who have not ventured into sustainable funding.
Although sustainable finance/ESG will find itself on shakier ground in the US in the coming months and sustainable bond issuance by US issuers is expected to decline, this will not be the death knell for the global market. First, and unfortunately, the US has already lost ground in the global sustainable bond market in recent years. The action is already elsewhere and will be elsewhere in the future. Europe will remain in the driver's seat in terms of new sustainable bond issuance. It is also home to the largest number of sustainable and responsible investors in the world. With an estimated share of more than 40% of the new issuance volume in 2025, it will continue to be the largest source of sustainable debt on the globe. In fact, as the net-zero targets set by most European governments require significant funding, we expect sustainable bond issuance in Europe to continue to grow. In addition, we do not expect many European financial institutions that issue sustainable bonds to pull out of net-zero initiatives, in contrast to their US counterparts. It will also be worth keeping a close eye on Asia, which is increasingly becoming a robust source of growth of sustainable debt.
Current developments are also likely to further strengthen the role of the euro in the sustainable bond market. With an estimated share of more than 40% of the new issuance volume in 2025, it will remain the most used and sought currency in the global sustainable bond market in 2025 and beyond.
With new records in sustainable bond maturities set to be reached in the next two years, a large proportion of which will be green bonds, there will be an enormous refinancing requirement, especially for European issuers. It is to be expected that in this context, several issuers will update or expand their frameworks to include new categories or instruments.
Efforts to simplify the regulatory landscape and increase its usability could also provide further growth impetus. Many issuers support a balanced approach to sustainable finance regulation, which will help the market grow, and warn against over-regulation and excessive complexity, which can have negative effects. Regarding taxonomies, many issuers call for harmonisation, usability, and interoperability, but not uniformity. Sustainability always has a cultural component. Hence, there is no "one size fits all" solution.
No new highs, but not a leap off the cliff, either
In 2025, we expect the sustainable bond market to move broadly sideways. We forecast new issuance to reach around $975 billion, rising by just over 5% compared to 2024.
While the new issuance volume of green and sustainability bonds is likely to increase for the reasons outlined above, we expect a slight decline in the issuance of social and sustainability-linked bonds. The growth of the former is limited by a lack of benchmark-sized projects. As for the latter, there is still a lot of scepticism in terms of materiality, ambition and hence credibility. Transition bonds are likely to remain at 2024 levels, driven mainly by Japanese government issues.
Green bonds will remain the dominant segment of the market with a share of 58%. After the successful debuts of A2A and Île-de-France Mobilité, we expect further bonds to be aligned with the European Green Bonds Standard (EU GBS), but not a major wave for the time being. It remains to be seen whether the new standard will find the desired acceptance among issuers and investors and whether it will be able to establish itself as the gold standard over the established ICMA Green Bond Principles. The share of sustainability bonds will continue to grow.
From 2026 onwards, when the controversial debate on sustainable finance, fuelled by critics, will have receded into shallow waters, we expect issuance to pick up significantly and double-digit growth to return. Investor appetite for sustainable bonds will remain strong, driven by the underlying fundamentals of the market, the unwavering global drive for sustainability and the enormous opportunities presented by the sustainable transition. Hence, in terms of order books, the following will still apply in 2025: There will still be too much demand chasing too little supply.
Green bonds and carbon markets – a complementary fit
Frank Scheidig, global head of senior executive banking at DZ BANK AG
Given the complementary nature of green bonds and carbon markets, the development of the latter is being watched with great interest.
COP29 saw significant progress and developments in the structure and implementation of carbon markets. After nearly a decade of negotiations, it laid the foundations for functioning global carbon markets.
Several countries have made progress in finalising the rules for carbon trading and market-based mechanisms that will help them to meet their emission reduction targets. The focus was on ensuring transparency, integrity and accountability in the trading and accounting of carbon credits. Commitments have been made to increase the purchase of carbon credits and to increase participation in the carbon market. There was a greater emphasis on ensuring the quality of carbon credits and a push for credits that are more transparent, verifiable, and linked to real, additional, and long-term emission reductions. Some countries called for stricter rules to prevent "greenwashing" and to ensure that carbon markets do not simply become a way of offsetting emissions without actually reducing them. There was a strong focus on how carbon markets can be a tool to help developing countries meet their climate goals and an increased dialogue on making carbon markets more accessible and beneficial to countries with lower carbon footprints, providing them with financial incentives through international carbon credits. Discussions of carbon border adjustment mechanisms emerged, whereby countries with high carbon prices could impose tariffs on imports from countries with lower carbon prices, with implications for international carbon markets and trade.
The results of COP29 offer promising developments for the future of carbon market particularly with the long-awaited agreement on Article 6 of the Paris Agreement. While it has made some progress in shaping the rules of the road for carbon markets, the process is still ongoing, with countries continuing to negotiate the finer details of how these markets will operate in a fair, effective, and equitable way.
We also call for innovative solutions when it comes to voluntary carbon trading. To implement the global sustainability agenda, public capital alone is not enough. Therefore, innovations are needed in the carbon markets which are focusing on mobilising private capital. At the same time, they should focus on the engine of the global world economy: small- and medium-sized enterprises. This important part of economic life has so far played only a subordinate role in most considerations, but it is crucial for the global transformation process of our economy and society. Due to the complexity of the market and the associated uncertainties, it has so far not been possible for most small- and medium-sized enterprises (SMEs) to become part of the carbon offset market.
Green bonds and carbon markets: Two different mechanisms with the same objective
Green bonds and carbon markets both play a critical role in financing and incentivising climate action. Both mechanisms aim to reduce emissions and stimulate investment in sustainable technologies and climate-friendly infrastructure for example, but in complementary ways.
Green bonds can finance projects that help generate or reduce carbon emissions, such as building wind farms, installing solar panels, or investing in carbon capture technologies. The funds raised through green bonds can go directly into activities that help reduce carbon emissions, which in turn can contribute to the supply of high-quality carbon credits in the carbon market.
For example, a green bond funded project can generate carbon credits that can then be sold on the market, creating a revenue stream for project developers, making them more financially attractive and self-sustaining.
Both green bonds and carbon markets attract investors interested in the sustainable transition. However, green bonds often appeal to institutional investors looking for low-risk, fixed income investments, while carbon markets can attract companies and organisations looking for a more direct way to offset their emissions.
Combining the two gives investors access to a wider range of financial instruments – green bonds for financing long-term projects, and carbon markets for short-term emissions management or offsetting. This helps to increase the flow of capital into the sustainable economy.
Carbon markets provide a mechanism for companies to offset emissions they cannot reduce directly by purchasing credits from projects that reduce or eliminate emissions elsewhere. Green bonds can finance the projects that generate these credits, creating a direct link between investment in sustainable initiatives and the carbon reduction goals that companies are trying to achieve through carbon markets.
Carbon markets drive the demand for emissions reductions, creating a financial incentive for projects that reduce carbon emissions. Green bonds, meanwhile, provide the capital to finance such projects. By working together, these tools can scale-up the transition to a low-carbon economy more effectively than if they were used separately, addressing both the financial and regulatory aspects of climate action.
As lower-risk investments for institutional investors, green bonds can provide a stable source of funding for carbon reduction projects. Meanwhile, carbon markets, by putting a price on carbon emissions, provide an economic signal that increases the market value of carbon reduction projects, helping to make them more financially viable. The combination of these mechanisms can reduce risk for both investors and project developers.
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