Resilience, innovation and reinvention: the sustainable bond market in 2025

While overall market growth remains elusive, issuers and policymakers are continuing to innovate in 2025. Moody's Ratings' Adriana Cruz Felix, Matthew Kuchtyak and Swami Venkataraman analyse the market

Environmental Finance: Last year was the fourth straight year of around $1 trillion in sustainable bond issuance. What are your expectations for volumes in 2025?

In terms of the composition of the market, again we see broad continuity. We expect that green bonds will remain the largest part of the overall market, at around $620 billion of issuance. While the primary focus here will remain on climate mitigation, we expect to see growth in climate adaptation and nature projects.

In terms of social bonds, we're expecting a slight decline in volumes, to about $150 billion, as we are now well past the bulk of pandemic-related financing. For sustainability bonds, we're expecting $175 billion of issuance, with continuing long-term growth and support in that market, which is a bit more diverse than the social bond label, with more issuers who can get to a benchmark-sized offering by combining green and social projects.

We're forecasting $35 billion of sustainability-linked bond (SLB) issuance, slightly up from last year but still well below the records that we saw in 2021 through 2023. Many issuers remain wary of accessing the SLB market, as investor scrutiny of target ambition and financial materiality persists. Finally, we expect $20 billion of transition bond issuance, largely concentrated in Japan. With a growing focus on transition finance and more awareness of transition bonds, however, there is potential for some gradual diversification in the segment.

Swami Venkataraman: I think it's worth noting that, even though the market has been flat at around $1 trillion, that is in the context of some serious headwinds, starting with Russia's invasion of Ukraine in 2022 and the subsequent focus on energy security, higher interest rates and mixed policy developments. There have been questions around whether this market was going to be resilient. I think an important takeaway is that the market continues to account for 10%-plus of the overall bond markets.

EF: How do you see the policies of the new US administration impacting the market?

MK: The new administration's climate agenda diverges sharply from the previous administration, which will result in renewed support for the fossil fuel industry, reduced funding for clean energy and green technologies, and loosened environmental regulations.

However, from a volume standpoint, we've already seen quite a bit of decline among North American-based issuers and lower penetration rates in terms of sustainable bonds as a share of total issuance. These trends were already happening before the November election. In 2024, for example, sustainable bond issuance in the region was about 30% lower than in 2021, and volumes represented around just 3% of total issuance in the region. That compares with nearly 20% in Europe.

Given continued investment from parts of the private sector and certain state and local governments, along with the already-low penetration of sustainable bonds in the US market, we do not expect a significant further decline in US sustainable bond volumes in 2025. However, the evolving policy landscape will limit any rebound in issuance.

EF: To what extent will the new EU Green Bond Standard (EU GBS) change the European sustainable bond landscape?

The fact that, so far, we have only seen a couple of EU GBs come to market suggests that issuers are taking it slowly: they want to see how the market develops, and they want to make sure they get it right. It's important to remember that although the use of the EU GBS is voluntary, issuers who choose to use the EU GB label for their bonds must ensure compliance with the regulation's requirements. Failure to meet the requirements may result in sanctions from competent authorities.

Increased market and regulatory scrutiny, alongside greenwashing concerns, may cause issuers to take longer in structuring EU GBs.

EF: Will emerging market issuance rebound in 2025?

SV: Emerging markets may be one area where we could see growth in 2025, because there are substantial gaps in terms of the climate finance that emerging economies need. In addition, we have COP30 coming up in Brazil: we saw the COPs in the Middle East leading to an increase in sustainable bond issuance in that region.

And, to the extent that investor interest creates a 'greenium' in pricing, this could help reduce, if only to a small extent, the high cost of capital that emerging markets typically face in raising finance for climate mitigation and adaptation.

But another point we often make at Moody's Ratings is that, for some emerging market countries, reforms have strengthened credit quality, and hence lowered the cost of borrowing, despite low incomes. A number of governments have carried out economic reforms to enhance their business climate and competitiveness, almost always backed by institutional reforms. Where successful, such reforms have increased policy effectiveness and resilience to shocks and led to sustained strengthening in credit quality.

ACF: An innovative type of eligible project that we saw included in a framework last year was the financing of projects to assist public policies aimed at strengthening the productive sector, the investment climate and budget sustainability by the French development bank, Agence Française de Développement. These projects include ongoing monitoring of implementation and effectiveness, with the gradual disbursement of funds linked to the achievement of key performance indicators.

EF: What types of projects will be the most common in 2025? Will climate mitigation remain the primary focus?

ACF: We're also seeing growing interest in nuclear energy as a means to address growing energy demand. Nuclear became controversial following the 2011 Fukushima accident. However, with the substantial demand forecast from artificial intelligence, some investors are seeing it as a promising means of meeting this growing need.

EF: How will the transition to a low-carbon economy be financed this year? Do you expect to see growth in the transition bond segment?

SV: We have seen Japan articulate a very ambitious approach to transition finance. Singapore and Australia are both now trying to do so. The Asia-Pacific region needs huge amounts of funding for the transition, and there is an effort to channel much of this through labelled transition bonds.

The transition label has been difficult to define, which meant it has not really taken off. However, given the significant regulatory push in Japan, Hong Kong, Singapore and Australia to define the transition label, we might see that become a growing option for transition funding in 2025.

EF: What is your outlook on adaptation and nature-related financing in the sustainable bond market?

SV: When it comes to climate change mitigation, the market now has a very clear view on how to account for the benefits of greenhouse gas emissions reductions. In contrast, for projects related to adaptation and nature, there is less clarity about the benefits that they can deliver. However, the labelled market has the potential, with the transparency it brings, to demonstrate the benefits from these projects.

We expect proceeds in the labelled bond market to continue to diversify and to see more issuance linked to adaptation- and nature-related projects. Adaptation and resilience will become more prominent in policy and investment as the costs of extreme weather rise and Paris Agreement targets seem increasingly unattainable.

ACF: The emphasis on conserving ecosystems and biodiversity to combat global warming will also boost labelled debt issuance for nature-based solutions. Proceeds from adaptation- and nature-related green and sustainability bonds have steadily increased, reaching record levels in 2024 at $73 billion and $113 billion, respectively, and accounting for around 23% of these bonds' proceeds, a share that has grown annually since 2020.

For example, last year we worked on a blue bond framework to finance a really interesting project to cultivate kelp forests along the Namibian coastline. Kelp and seaweed aquaculture capture and store carbon, reducing greenhouse gas emissions, but also offer sustainable alternatives to fossil fuels in multiple industries.

Harvested kelp is transformed into products like bio-stimulants for farmers, reducing the need for chemical inputs in agriculture. Diverse applications of kelp derivatives, such as bioplastics and pharmaceuticals, increase its market potential. Kelp forests also provide significant ecosystem services, including nutrient recycling and buffering ocean acidification.

Since the launch of the International Capital Market Association's Blue Bond guidelines in 2023, we're seeing a of potential for issuances related to fisheries and marine nature-based solutions. The difficulty is that these projects, similar to adaptation projects, tend to be publicly funded: the challenge has and will continue to be to mobilise private capital towards adaptation and nature-related projects.

EF: What about the social side of the market? How do you see its prospects as pandemic-related issuance falls away?

MK: We've been seeing a slight decline in issuance in this relatively concentrated part of the market in recent years, as pandemic-related financing has wound down. But we're still expecting $150 billion of issuance in 2025, much higher than the $19 billion issued in 2019 before the pandemic.

We're also seeing social projects getting financed through sustainability bonds, and there's much consideration among issuers of green bonds, for example, around managing the potential social externalities of environmental projects.

ACF: For emerging markets, the inclusion of social projects in labelled instruments is a natural measure to address the biggest socioeconomic challenges of these countries – whether related to education, access to essential services such as water or public transportation, micro-finance or affordable housing. When we assess frameworks from development agencies, multilateral development banks and emerging markets sovereigns, we see that the focus tends to be on broad sustainability challenges and not just on climate change mitigation. These frameworks are bringing higher-quality social projects, specifically aimed at supporting the most vulnerable populations, that sometimes include environmental co-benefits.

Adriana Cruz Felix is head of sustainable finance assessments, EMEA, based in Paris, Matthew Kuchtyak is head of sustainable finance assessments, Americas, based in New York, and Swami Venkataraman is global head of sustainable finance assessments, also in New York, for Moody's Ratings.

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