Calendar year 2024 was strong for Green Bonds, outperforming conventional bonds by nearly 2%, [1] and achieving record issuance of US$447bn. This marks the second consecutive year of outperformance for green bonds, occurring in six of the last eight years, and matches the Green, Social and Sustainability (GSS) universe’s 2021 issuance record, surpassing 2023 by 17%.

Sovereigns enjoyed strong momentum, accounting for 28% of issuances, reflecting the strong dynamic among European countries but also new issuers including Australia [2].

The euro remained the key driver of growth with 60% of issuances while Emerging Markets (‘EM’) declined from 10.4% to 6.5% [2]. Of particular significance is the decline in issuances from US issuers which was only 8.5% (half of what it used to be) and led a sharp decline in USD-denominated issuances (14% versus 20% last year) [2].

What the impact of Trump could mean

The decline in USD issuances in green bonds can be interpreted in different ways:

• Backlash to ESG in the US: In 2024, more issuers have stopped issuing green bonds, reflecting a decline in ESG popularity. While this may limit new opportunities in the US Green segment, sustainable investments are growing, supported by the Inflation Reduction Act, as issuers prefer not to highlight their green investments.
• Broader issuer focus: While USD green issuances have declined, social and sustainability bonds have increased. This trend isn’t limited to US issuers; emerging markets and Asia are also participating, with examples like Chile, which issues green, social, and sustainability bonds.

A changing, more regulated landscape

The transparency and robustness of frameworks guiding GSS bond issuances have seen significant improvements over the past two years. 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 [3].

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. There is also a growing trend towards integrating social considerations alongside environmental ones within sustainability frameworks, promoting a more holistic approach to financing.

Outlook

We believe this year should again be promising and break new records as net zero investment requirements remain massive. Indeed, there are plenty of reasons to be optimistic:

Firstly, the green bond market is now 10 years beyond the Paris Agreement which gave a fillip to the market and 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.

Secondly, hierarchy should remain relatively unchanged with domination from Europe and EUR denominated issuances. We also expect that credit will continue to account for more than 50% with the potential for growth in industrials sectors.

We expect more sovereigns will issue green bonds. In Europe, only Finland, Portugal and Greece have not issued green debts, although Greece has referred to it as a potential instrument in its 2025 funding plan. In addition, the EU as a whole remains a significant green bond issuer, aiming to finance €250bn of green bond under the NextGen EU by 2026.

Another 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 anticipate a muted dynamic in the US, we believe projects funded by the Inflation Reduction Act will endure, especially since many beneficiaries are in Republican states. Despite some major US banks leaving net zero alliances, we do not expect this to impact the green bond market, which is primarily driven by European issuers, and these banks remain committed to existing agreements.

We foresee green bonds leading in the GSS space, but new products might gain interest, such as blue bonds for 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). The labelled bond market is continuing to evolve, across regions and sectors.

Opportunities for 2025

The performance of green bonds against the global broad market highlights the opportunities within the green bond universe:

• It is more exposed to Europe, where the macroeconomic context supports further rates cuts by the European Central Bank, unlike the more uncertain environment in the US.
• The green bond market could benefit from higher credit exposure, offering additional yield and healthy fundamentals.

We forecast the green bond issuance levels to approach US$600bn next year and US$1000bn for GSS bonds together. The trend of falling interest rates and healthy corporate fundamentals, especially in Europe, is likely to continue into 2025, which should boost demand for the asset class.

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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

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