Despite political headwinds, sustainable bond issuance is set to be supported by strong fundamentals, innovative applications and strong investor demand, say Trevor Allen, Agnès Gourc, Chaoni Huang, Franck Rizzoli and Frederic Zorzi of BNP Paribas
Environmental Finance: What do you see as the main drivers of issuance in the sustainable bond market in 2025?
Frederic Zorzi: The introduction of the EU GBS is positive progress for the market, as it will provide greater clarity and reliability for investors. This added stability will ultimately translate into increased investor demand for these issuances. With the introduction of this standard, the EU will continue to be a major engine driving the sustainable bond market forward alongside the continued and accelerating drive to decarbonise, which continues at pace both in the EU and Asia.
Trevor Allen: For green bonds, specifically, we expect issuance to grow around 8% this year, to $660 billion from $609 billion in 2024. A big factor is the 'maturity wall', a term we coined to describe the fact that between 2025 and 2026 an equivalent volume of bonds will mature as were issued in the whole of 2023. This creates a 'push-pull' effect – where issuers are more likely to roll over their green debt and investors will demand new supply to replenish their maturing green bonds. We've never had a maturity wall like this before, so it's a big deal.
EF: There has been growing corporate issuance. What's behind that, and how do you see that evolving in 2025?
AG: We've seen corporates really step up in recent years, and I expect that trend to continue. In 2024, close to a quarter of all investment-grade corporate bond issuances in EMEA were issued in sustainable bond format. Part of it is that more companies have integrated sustainability into their financing strategies – not just as a compliance exercise but as a core business priority. Many of the investments being made are also driven by the growing imperative to be on track to achieve net-zero targets for 2025 and 2030.
Further to this, sitting behind the green bond label are a relatively wide range of environmental objectives, not just to decarbonise, but also efforts in adaptation, biodiversity targets and water management, to name a few. There are these additional incremental expenditures that have added to the desire from corporates to tap into green capital pools, as they are recognising that sustainable bonds can provide access to a broader pool of investors.
TA: In Europe, one in three bonds issued by a utility were in the form of a green bond. Onshore wind and solar are cost competitive and solar in particular provides one of the quickest means for utilities to meet growing electricity demand. Meanwhile, we're seeing technology companies entering into clean energy power purchase agreements to meet their power demand and turning to green bonds as an obvious way to fund those projects.
In addition, we've seen more and more global sustainability commitments from corporates. Many of these have been using green bonds as a stakeholder engagement tool, to help their investors understand how they are changing their product or service mix as part of their transition plans.
EF: How are those corporate sustainability plans likely to be affected by the changing political environment?
We also expect to see continuing strong focus from issuers in the Global South. With Brazil as the host of COP30 this year, we see a strong drive to issue green bonds and to be vocal about it. Given something of a global vacuum around sustainability, I see real potential for leadership in the climate talks to emerge from Brazil and some of the other 'BRIC' countries, such as India and China, which could well feed into innovation around sustainable finance.
AG: Sustainable finance is increasingly global and, while political shifts in the US could influence sentiment, the broader momentum behind sustainable bonds remains strong. Regulatory frameworks in Europe, Asia and other regions are continuing to evolve, and investor demand is still there and has historically always been driving these markets. Companies with long-term sustainability commitments are unlikely to fundamentally change course based on short-term political dynamics.
EF: What about sentiment from the investor community?
EF: How are your clients thinking about the approaching EU GBS? Do you think it's likely to spur significant issuance?
FZ: The EU GBS is absolutely a step in the right direction. Ultimately, the test of effective regulation from an investor perspective is that it encourages standardisation that enhances comparability and harmonisation of approach. This standardisation then allows for investors to access consistent data and make informed decisions, which in turn promotes confidence in the market and drives further demand.
AG: The EU GBS is certainly a welcome step. One key consideration for issuers will be aligning their frameworks with the new requirements, particularly around EU Taxonomy alignment. That said, there are already a number of transactions in the market that have been very successful. BNP Paribas has been active on most, and there is now a very good understanding of the application of the regulation. It is seen as a complement to the International Capital Market Association (ICMA) Green Bond Principles (GBPs), and investors expect alignment to both the GBPs and the EU GBS.
FR: Investors see it as a positive evolution for the asset class, given the transparency and additional requirements that it introduces – but it still remains a nascent asset class. As we progress and more issuers get to grips with the new standard, we would expect to see investors begin to look for more aligned issuances.
EF: What are you seeing from the sovereign, supranational and agency (SSA) part of the market?
AG: Supranationals have always been pioneers in the sustainable bond market, and that hasn't changed. They're setting benchmarks and helping to develop new methodologies and frameworks. Their presence continues to provide liquidity and credibility to the market.
Chaoni Huang: We could see new thematics coming in, particularly when it comes to climate adaptation. This is likely to become an important part of the market, given the world's inability to hold global warming below 1.5°C: it will become critically important to adapt to warming, at the same time as continuing to work to mitigate emissions. Given that investments in adaptation tend to be in public goods and public infrastructure, it makes perfect sense for SSAs to lead with climate-resilient issues. We have seen just such an issue last month, with the Asian Infrastructure Investment Bank's second climate adaptation bond, raising AUD500 million ($380 million).
EF: Transition bonds have proved popular in Japan, but not elsewhere. What will it take for their appeal to spread?
Given the relative carbon-intensity of the Asian economy, it's natural for Asia to take the lead with this part of the market. It's important for investors to understand the local context, and how transition finance fits in with the decarbonisation of companies across the region: for those investors with Asian exposure, these emerging taxonomies provide a very good basis to define transition in the region. I expect to see more transition bonds issued from this part of the world and, more importantly, to see global acceptability of transition bonds by international investors.
AG: Transition bonds can make a lot of sense for companies in high-emission industries, but they need a clear framework to gain wider acceptance. Investors want to see strong science-based targets and credible transition plans with related investments. Japan has led the way, but until other markets develop transition taxonomies, we will lack broader adoption. The key is ensuring that these instruments are robust and not seen as a form of greenwashing.
EF: How are pricing trends evolving? Are issuers still able to benefit from a 'greenium'?
FZ: We certainly still see a benefit for issuers, although it is natural that, at a time when the market is historically very tight, the difference in pricing inevitably narrows somewhat. We continue to see a clear boost in terms of demand from investors for these issuances.
TA: There remains a greenium in European sovereigns, although it does fluctuate. Over the last two years, while rates were going up, this effect was seen most clearly in shorter-dated bonds. However, as rates come down, we expect the greenium to move to longer-dated paper, as investors seek to lock in higher rates for as long as they can.
A greenium is a function of supply and demand, and one of the things that drives that demand is investors seeking diversification. So, if there's issuance from a geography or a sector that doesn't typically issue sustainable debt, it is likely to be able to attract a pricing premium.
CH: In the APAC region, we've been analysing the pricing of sustainable bonds issued in dollars and euros compared with conventional bonds. We found that, over 2024, sustainable bonds delivered additional pricing compression of 3.5 basis points (bps) compared with their conventional equivalents. In terms of new issuance premium, sustainable bonds also outshined conventional bonds, by 3.38 bps. So, there's a bit of green premium to issuers, but it shouldn't be exaggerated: the main benefit to issuers from sustainable bonds is their ability to attract additional demand.
EF: Finally, what innovations do you expect to see in the market in 2025?
TA: Transition bonds are going to be a key source of innovation, and I expect China to really explore this part of the market. One of the benefits for Chinese issuers is that they have a large domestic investor base, so they don't need to develop a transition label that is necessarily universally accepted. I think the Middle East will start to look at transition bonds as well.
CH: I also expect to see innovation around blended finance. We hope to work closely with the multilateral development banks (MDBs) and development finance institutions (DFIs) to help issuers in emerging markets with credit challenges to come to market. There are various instruments that can help de-risk sustainable debt issuance from these issuers, whether its credit guarantees, partial guarantees or tapping concessional capital.
AG: Blended finance or development finance, however you name it, is the area where I would expect most innovations to come from. There is a real need to develop better structures, with the help of the MDBs and DFIs, to make financing the Global South more palatable to institutional investors.
Frederic Zorzi is global head of primary markets, Trevor Allen is head of sustainability research at BNP Paribas Markets 360, Agnès Gourc is head of sustainable capital markets, BNP Paribas Global Markets, in London, Chaoni Huang is head of sustainable capital markets, global markets APAC, at BNP Paribas in Hong Kong, and Franck Rizzoli is head of ESG financing advisory, at BNP Paribas in London.
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