The sustainable bond market is growing rapidly.

We explain some of the

market dynamics and provide a starting point for enhanced scrutiny.

Overview
As responsible investment has matured across asset classes, the market has
responded with a variety of products and approaches aimed at investors considering
environmental, social and governance (ESG) factors. These have allowed investors
to intentionally channel capital towards environmental and/or social areas or to target
specific outcomes. Fixed income investors have benefitted from this expansion in
sustainable products, however they also face a confusing array of choices that
require careful review to ensure alignment with investment strategies.
The PRI’s introductory guide to fixed income addresses three approaches to
incorporating ESG factors into existing portfolio construction practices: integration,
screening and thematic. Thematic ESG investing refers to the allocation of capital to
themes or assets related to certain environmental or social outcomes, such as clean
energy, energy efficiency, community regeneration, supported housing, financial
inclusion, or sustainable agriculture. Thematic investors seek to combine attractive
risk/return profiles with an intention to contribute to a specific environmental or social
outcome or impact.
Within fixed income, investors are increasingly investing thematically through the
purchase of debt instruments (bonds or loan issuances) that differ from conventional
instruments in their explicit linkage to ESG or sustainability parameters (read more in
this blog by three PRI signatories). The range and size of this ESG-labelled or
sustainable finance market continues to develop rapidly, including bonds that carry
green, social or sustainability (GSS) labels, with clear use of proceeds. Also growing
in popularity are sustainability-linked bonds, with coupon payments linked to specific
ESG/sustainability performance targets. For the purposes of this article we will use
the terms sustainable and thematic interchangeably and use bonds or issuances to
refer to both bonds and loans.
The benefits to sustainable bond issuers are becoming more apparent given strong
and persistent demand from responsible investors. Issuer benefits include:

 investor diversification across regions and types

 investor engagement and “stickiness”
 strong oversubscription, tighter yields
 strengthened reputation
 alignment of CSR (or core business where pure play) with funding scheme
Investors in sustainable bonds also enjoy a range of benefits:

 well-understood projects reduce risk exposure

 well-managed projects reduce risk exposure
 trading at a premium in secondary markets
 strengthened reputation
 deeper engagement with company management on green outcomes
It is important to note that buying these instruments does not necessarily exempt
responsible investors from conducting appropriate due diligence. Investors should
assess the veracity of the bond’s funding purpose or how the bond fits into the
issuer’s sustainability strategy. More broadly, investors should ensure that they
understand the characteristics of thematic bonds (which may or may not carry a
formal label) to determine whether they fit the investors’ investment policies,
strategies, and goals.
This article offers an overview of the sustainable bond market and seeks to address
confusion surrounding standards for sustainable bonds and providers of assessment
services. The PRI hopes that this initial mapping can inform investors and provide a
starting point for enhanced scrutiny. The following areas are covered:

 Sustainable bonds

o Use-of-proceeds bonds vs. sustainability-linked bonds

o Labelled bonds vs. unlabelled bonds
 The labelling process
o Bond standard organisations
o Verifying organisations
 Sustainable bond databases

Sustainable bonds
Lenders of capital can follow a thematic approach by deploying sustainable bonds,
which are debt securities issued by both public and private entities. The funds
obtained must be used to finance specific projects with positive social and/or
environmental impacts or with pre-selected performance targets. Sustainable bonds
have grown rapidly in recent years, reaching US$4 trillion in June
2023.1 Sustainable bonds can help investors and issuers focus on specific
environmental or societal outcomes. Investors can use these bonds to direct capital
toward sustainable goals and ensure that issuers meet sustainability criteria set out
in the bonds.
Figure 1: Growth in sustainable bond issuance (Sources: Moody’s Investors
Service and Environmental Finance Data)
The first sustainable bond

The European Investment Bank (EIB) issued its Climate Awareness Bond (CAB) in
2007, the world’s first sustainable bond. The CAB, which follows the use-of-proceeds
model, provided a pool of funding for projects that met the climate mitigation criteria
set by the EIB, which, in turn, reported on the climate impact of those projects. CABs
introduced the notion that it is possible to report on the impact an investment makes
on sustainability goals, linking finance closer to the real economy.
Subsequently, the World Bank issued another sustainable bond in 2008, a use-of-
proceeds green bond that was created in response to large institutional investors
looking for an investment product that explicitly supported climate-related projects, in
this case climate mitigation and climate adaptation. The issuance was the first to
define eligibility criteria for green bond projects, and the first in which investors
received assurance, through a second-party opinion provider, that eligible projects
would address climate change.
Through its own issuance and its support of other issuers and investors, the World
Bank has led the development of the market for sustainable bonds. Since 2008, it
has issued approximately US$18 billion equivalent in green bonds through over 200
securities in 25 currencies.2 It was also the first to commit to reporting to investors
on the use of green bond proceeds and expected project impacts, setting a market
standard and forming the basis for the green bond principles later coordinated by the
International Capital Markets Association (ICMA ).

Structures of sustainable bonds

There are different ways sustainable bonds are structured to address ESG themes.
These include: use of proceeds, sustainability-linked, transition (which could be
either of the former two), debt-for-nature swaps, as well as other hybrid issuances
(that are project based with targets).
For the purposes of this introductory article, we will be focusing on the structures of
use-of-proceeds bonds and sustainability-linked bonds. It is important to note that
the market was largely limited to use-of-proceeds issuances in the beginning, but
that is now expanding to include the various structures mentioned.
Use-of-proceeds bonds (UoPs):

 Bond proceeds are used for designated projects to provide environmental

benefits, positive social outcomes and/or sustainability outcomes. Outcomes
are material targets and are regularly monitored, but not necessarily
quantitative or pre-determined.
 Green bonds, transition bonds, social bonds and / or sustainability bonds
belong to this category.
 Sovereign, sub-sovereign and corporate entities have issued these bonds.

Sustainability-linked bonds (SLBs):

 The financial and / or structural characteristics can vary depending on

whether the issuer achieves pre-defined sustainability / ESG objectives.3
 Proceeds are intended to be used for general purposes, but issuers commit
explicitly to future improvements in sustainability outcome(s) within a pre-
defined timeline.
 Sustainability / ESG objectives are measured by quantifiable key performance
indicators (KPIs) which are linked to pre-defined Sustainability Performance
Targets.
 Corporates, a municipality (Helsingborg4) and two sovereigns (Chile5 and
Uruguay6) have issued SLBs to date.
When corporations or public sector issuers (such as sovereign and sub-sovereign
entities) consider issuing sustainable bonds, their choice between UoPs and SLBs
will be influenced by factors such as the degree of flexibility provided to the issuer.

Labelled versus unlabelled

Labelled bonds are the gold standard for thematic investors, with a mandatory
certification process, external review, and reporting requirements, as explored further
below. But there are significant thematic investing opportunities beyond this
category. In 2020, the Climate Bonds Initiative (CBI) identified over US$913 billion in
unlabelled sustainable bonds from 420 climate-aligned issuers based in 45
countries. China and North America alone are home to a high volume of unlabelled
climate-aligned green bonds (excluding social or sustainable bonds) of potential
interest to responsible investors.7 The types of issuances include bonds in sectors
such as agriculture, buildings, energy, information and communication technologies,
land use, transport, water and waste.
Unlabelled bonds are often in sectors that are inherently environmentally friendly or
of social benefit, however, may not perform well in the certification process if the
issuer is part of a larger entity involved in controversial themes (e.g. nuclear). Other
issuers choose to self-label to avoid the burdens of the labelling process.
Investors considering unlabelled bonds face a lack of harmonisation of green
definitions and reporting standards across countries and regions. In addition,
corporate reporting may omit information that is important to investors. For instance,
it can be difficult to evaluate corporate revenues that are specifically linked to green
business lines for companies with diversified business activities.
Despite these hurdles, unlabelled bonds may still be attractive to investors building
portfolios aimed at specific environmental or social outcomes. Investors can always
engage with issuers to seek certification or collect data to ensure that bonds meet
the sustainability goals laid out in the prospectus.

Labelled sustainable bonds

Labelled sustainable bonds typically adhere to recognised standards and have gone
through a certification process.
The ICMA, the CBI, the European Green Bond Standards (EUGBS) and the ASEAN
green, social and sustainability bond standards are among those providing guidance.
They are all voluntary while the EUGBS has gradually moved toward regulation.[8] As
of February 2023, a provisional agreement on European green bonds (EuGB) has
been reached. While it imposes requirements on issuers that choose to use this new
EuGB label – there are no obligations for those who do not use the label. 9
Bond standards support issuers by providing guidelines on how to structure a
labelled bond, along with associated disclosures and reporting. These guidelines are
also meant to help investors by enhancing the transparency and comparability of
such instruments. Relying on well-established ESG definitions and market guidelines
minimises the risk of greenwashing.
Figure 2: Sustainable bonds at a glance. Source: PRI

Use-of-proceeds bonds Bonds linked to

performance / target /
outcomes

Green Transiti Sustainabil Sustainabili Transiti

bonds on ity (SDG) ty-linked on
bonds bonds bonds bonds
(SLBs)

Scope of Narrow – Narrow Broad – can be any Narrow

ESG focus environmen – climate combination of – climate
tal, often related environmental/climate and related
related to social sustainability
climate and objectives
mitigation
actions
 Area of Project/asset focused Issuer/entity-level
focus focused

Ringfencin Yes – the green purpose specified No – general purpose

g of funds

Coupon No Potentially. Typically the

payment coupon rate steps up if
tied to climate metric is not met.
performanc
e

Nature of Focus on project eligibility criteria Focus on

framework outcome/performance

Framework In a standalone document; not in Contained in prospectus

documentat prospectus
ion

Reporting Yes – voluntary (annually or less frequently)

Independen Not mandatory – voluntary Second Party Opinions sought

t opinion

Standards ICMA ICMA ICMA ICMA ICMA

available Green Bond Transitio Sustainabili Sustainabilit Transitio
Principles n Bond ty Bond y-linked n Bond
Principle Guidelines Bond Principle
s Principles s

The labelling process

An ecosystem has evolved around the labelling, or certification, of bonds. This
includes organisations that set standards for thematic bonds and providers that
confirm whether bonds meet the relevant standards, enabling certification. The steps
in the process include:
1. Bond standard organisations (BSOs) such as ICMA, CBI and EUGBS, set out
guidelines to define the characteristics of a thematic bond. Those by EUGBS are
linked to the EU Taxonomy.
2. Verifying organisations evaluate bonds against the BSO guidelines to assess
whether they qualify as labelled sustainable bonds.
3. If eligibility is confirmed, the BSO issues an opinion on eligibility or compliance
confirmation, allowing the bond to be listed in a database of similar thematic bonds
(see Figure 5).
4. These verifying organisations also verify thematic investments against relevant
sustainability criteria post issuance, confirming to bondholders that proceeds are
being used in line with the BSO criteria. However, it is important to note that ICMA
guidelines, unlike CBI and EUGBS, provide broadly recommended (as opposed to
necessary) principles that are not entirely fulfilled by all sustainable bond issuers.
Most issuers of thematic bonds have their bond products labelled before issuing.
Others may wait until after issuance, when a verifying organisation can confirm the
bond is compliant with BSO guidelines.
For example, the EIB’s Climate Awareness Bond (CAB) became a labelled bond in
2016 through the appointment of an external auditor as the external reviewer.
KPMG, EIB’s external auditor, confirmed alignment of EIB’s green bond activities in
2015 with the requirements of ICMA’s Green Bond Principles as well as the EUGBS.
Prior to its external review, the CAB would have been considered a self-labelled
bond, especially given that it was launched in 2007, whilst ICMA’s Green Bond
Principles were first issued in 2014.
Below we provide more detail on the steps involved in the certification process.

Bond standard organisations

A bond issuer begins by selecting an appropriate thematic bond framework that
captures the purpose of the bond. The issuer identifies and compiles supporting
information to meet that standard.
There are many BSOs that set out guidelines using a variety of factors and bond
characteristics. Some focus on sectors or themes while others have a regional focus.
International / transcontinental BSOs
CBI Climate Bonds Standard and Certification Scheme
GRESB-ICMA Guidelines for Real Estate
ICMA Green Bond Principles
ICMA Social Bond Principles
ICMA Sustainability Bond Guidelines
ICMA Sustainability-Linked Bond Principles
Regional / continental BSOs
Asean Bond Standards
EU Green Bond Standard
Febelfin label (Belgium)
FNG-Siegel Ecolabel (Austrian, German & Swiss)
Greenfin label (France)
Le label ISR (France)
LuxFLAG
Nordic Swan Ecolabel
People’s Bank of China green bond guidelines
Responsible Investment Association Australasia
Towards Sustainability label (Belgium)
The two most accepted frameworks, detailed below, are CBI’s Climate Bonds
Standard and Certification Scheme (CBSC Scheme) and ICMA’s Green Bond
Principles (GBPs). It is important to note that ICMA’s is a voluntary standard based
on best market practices whilst CBI’s uses a scientific framework to define which
projects and assets are consistent with achieving the goals of the Paris Agreement
and therefore eligible for inclusion in a Certified Climate Bond, Certified Climate Loan
or Certified Climate Debt Instrument. The CBI certification scheme includes robust
approaches for monitoring, reporting and assurance of conformance with the Climate
Bonds Standard.
CBI’s Climate Bonds Standard and Certification Scheme
The CBSC Scheme was produced in 2010 by the CBI. It is used by bond issuers,
governments, investors, and the financial markets globally to prioritise investments
aimed at addressing climate change.
The Scheme incorporates ICMA’s Green Bond Principles and other global thematic
bond certifications (listed in Figure 3 above). Independent verification (based on the
four components shown at right) is performed by approved verifiers. The Climate
Bonds Standard Board has oversight of the approved verifiers, which are under
management by the Climate Bonds Secretariat.
The Climate Bonds Standard, which details management of proceeds and reporting
processes, is an assurance framework with consistent procedures.
This differs from the Second-Party Opinion (SPO) model, where different external
reviewers produce reviews based on their individual methodologies, which vary
across reviewers.
Annual reporting is required of the issuer through the term of the bond.
ICMA’s Green Bond Principles
The GBPs were produced in 2014 collaboratively by capital market intermediaries,
issuers, investors, and environmental organisations under the ICMA leadership.
The GBPs are updated annually by the ICMA to promote integrity in the thematic
bond market by emphasizing more transparency, accuracy and integrity, as well as
uniform disclosure from issuers. GBPs have four components:
1. Use of proceeds
Proceeds from issuance must be used to finance or refinance green projects.
2. Process for project evaluation and selection:
For the specific green projects to be financed, issuers are encouraged to disclose:

 overarching environmental objectives and policies

 environmental sustainability objectives
3. Management of proceeds
Issuers are encouraged to use an internal control system to monitor money
movement from the issuance and to engage a third party (e.g., auditor, internal
control consultant) to verify and track usage of net proceeds.
4. Reporting
For as long as green bonds are outstanding, issuers are required to disclose on an
annual basis up-to-date information on:

 proportions of allocated and unallocated net proceeds

 any green projects which have been financed and/or will be financed with the
proceeds of the green bond issuance
 development progress and impact of the funded green projects
The GBPs encourage issuers to apply both qualitative and quantitative performance
measures to describe the status of green projects and estimated performance when
fully operational.

Types of reviews
To have bonds certified as meeting the relevant BSO standard, issuers need to carry
out internal reviews and/or obtain external reviews by verifying organisations.

Internal
Some BSOs allow for two types of reviews conducted internally by the issuer.
Impact reports: Issuer provides insights into what the thematic bond will help
finance and its associated environmental, social or sustainability benefits. The
objective is to quantify changes in the performance of an asset, project, or portfolio
with respect to a set of relevant indicators and benchmarks. Sometimes, these
internal impact reports carry the assurance of company management.
Sustainability reports: Issuer provides disclosure and communication of ESG goals
– as well as a company’s progress towards them.

External

It is more common for issuers to seek a second-party opinion or certification via an

external organisation, which assesses the bond product for alignment with BSO
guidelines. Once bonds are certified as thematic bonds, issuers can obtain a range
of research products and services to monitor the performance of the bonds to
maintain certification.
BSOs generally recommend, but do not require, that issuers use a detailed
taxonomy that addresses local climate change and environmental needs when
seeking a sustainable label. However, since 2020, the EUGBS has required
European issuers to use only the criteria set by the EU taxonomy regulation. In
China, the Green Bond Endorsed Project Catalogue has been in use by regulators to
guide the sustainable bond market since 2015.
A variety of organisations either provide a certification for a thematic bond or confirm
the bond’s adherence to an ESG framework post issuance:
Third-party assurances: Assurance reports assess an issuer’s proposed allocation
of fund proceeds to confirm whether the bond is aligned with a specific bond
standard. Third-party assurances are generally provided by accounting or audit firms
and are the basis for certification by the BSO.
Second-party opinions (SPOs): SPOs assess the feasibility of the project in
relation to the relevant ESG goals laid out by the BSO framework. Some provide
qualitative input on the framework chosen by the issuer and on the allocation of
proceeds.
Approved verifiers/external reviewers: These organisations provide specialised
services, such as scientific analysis or forensic accounting, for SPOs and/or third-
party assurances. Lists of approved verifiers and/or external reviewers are available
from CBI and from ICMA.
Figure 3: Documents needed for sustainable bond certification and
maintenance

Type of providers

Type of Third- Second- Approved

 Type of providers

reporting party party verifiers/external

assurances opinions reviewers

Pre- or post- Assurance/audit X

issuance (optional)

Certificate X X X
verification
(mandatory)

Sustainable X
bond
scoring/rating
(optional)

BSO reviews the documents listed above and below

Post- Impact analysis X X

issuance/ (recommended)
maintenance
Sustainability X X
analysis
(recommended)

Use-of-proceeds X X
analysis
(recommended)

Issuers may pay for the services of either third-party assurance providers or SPOs to
obtain a report verifying that the information laid out in the bond prospectus meets
sustainability criteria set out by the BSO (grey area in Figure 3). The BSO certifies
the debt instrument as a thematic bond if the report confirms alignment with BSO
standards (blue area). An issuer maintains certification by providing annual reports
confirming continuous compliance and updating any changes to bond characteristics
after issuance. Issuers can either publish their own impact reports to quantify the
positive thematic impacts of a project/asset, or they can seek the assistance of
SPOs or third-party assurances, which may provide more scientific rigour and
objectivity (light blue area).
Figure 4: Labelled bond certification process. Source: PRI based on publicly
available information
Collecting data post-issuance
Once a thematic bond is in the portfolio, analysis by investors is required to ensure it
remains aligned with its ESG purposes. Access to relevant data is not always
straightforward, as issuers may be late in providing investors with impact or
sustainability reports, sometimes because their financial calendar cycle is different
from that of investors. Two options are available to analysts:
Engagement: In cases where information is insufficient to make informed
investment decisions or justify existing holdings, an investor may choose to engage
with the bond issuer directly to request the necessary information and
documentation, which may take the form of emails, phone calls and/or meetings.
Research: Investors also can access a range of databases that target different types
of thematic bonds. Below is a list of resources for investors seeking additional
information about specific thematic bond issues.

Sustainability-linked bonds
The processes above are used for green, social and sustainability bonds. The
unique features of sustainability-linked bonds necessitate a different process. The
ICMA proposed the Sustainability-linked Bond (SLB) Principles, which state that
verification of SLBs takes place post-issuance, and that issuers are expected to seek
independent and external verification against each Sustainability Performance
Target for each KPI at least once a year. The principles include an appendix with a
non-exhaustive data checklist to help SLB issuers align their disclosure with the
needs of market practitioners (pages 7-9).
The CBI has launched the fourth version of the Climate Bond Standard, which now
includes an SLB certification process and allows the Climate Bonds Standard and
Certification Scheme to certify SLBs issued by non-financial corporates.

Sustainable bond databases

To help investors make informed decisions, we have assembled a list of industry
standards spanning multiple investment themes, as well as links to the relevant
databases.
Figure 5: Sustainable bond resources

Bonds Industry Purpose, use and focus Databases

Standard(s)

Green/ EU Green Bond Green bonds are used to finance projects linked to Environmen
Climate Standard energy efficiency, renewable energy, clean Finance Bo
transportation and green buildings, among others. Database
Proceeds must be applied to finance or refinance, in
ICMA Green Bond part or in full, new or existing projects that promote
Principles progress on environmentally sustainable activities. ICMA
Sustainabili
Bonds Data
African
Development
Bank’s Green and CBI Labell
Blue Bonds Green Bond
Framework Database

CBI Climate Bonds LuxFLAG

Standard and labelled ES
Certification Products
Scheme

Refrences Principles for Responsible investments (2023). Mapping the role sustainable
bonds play in the fixed income market. [online] PRI. Available at:
https://www.unpri.org/fixed-income/mapping-the-role-sustainable-bonds-play-in-the-fixed-
income-market/11570.article.
Green bonds reached new heights in 2023
Bloomberg Professional Services

February 8, 2024

This article was written by Jonathan Gardiner,

Sustainable Indices Product Manager, and Tom Freke,
Fixed Income Data Specialist at Bloomberg.

Sustainable bond issuance topped more than a trillion

dollars in 2023, bolstered by record levels of green
bond sales, data compiled by Bloomberg show.
Issuance of impact bonds (i.e., green, social,
sustainability and sustainability-linked) totalled $939
billion in 2023, up 3% on the same period last year. It’s
not a record – that was 2021 when issuance reached
$1.1 trillion.

One area where records were set in 2023 was green

bond sales from corporates and governments, which
climbed to $575 billion, a step up from 2022 and just
beating 2021’s $573 billion figure.

Explore our index families.

Learn more
The largest green bond sale of the year was from the
Italian government, in April, which totaled €10 billion.
And the biggest sector for impact bonds was
governments. Other European government issuers of
green bonds included France, Germany, Ireland, the
Netherlands and the United Kingdom. A total of $190
billion of green bonds were issued by governments
throughout 2023.
Social bond sales in 2023 roughly matched those of
the previous year, at $135 billion. That’s some way
short of the record issuance volumes during the
pandemic, when $220 billion of social bonds were
issued in 2021. The largest social bond of the year
was issued by La Caisse d’amortissement de la dette
sociale (CADES), owned by the French government, at
€5 billion.

Sustainability bond sales in 2023 dropped slightly

compared to that of the previous year, down 1.6% to
$161 billion. The International Bank of Reconstruction
& Development (IBRD) was responsible for the largest
sustainability bonds issued in 2023, at $5 billion. The
development bank was the largest issuer of
sustainability bonds throughout the year, with nearly
$50 billion in sales.

Sustainability-linked bonds (SLBs) saw the largest

decrease in issuance volumes in 2023, down 22% from
the previous year, with $68 billion. The Canadian
energy company, Enbridge, was responsible for the
largest sustainability-linked bond of the year, at $2.3
billion, issued in March.

However, despite the downturn in the SLB market,

2024 has already seen Enel, the Italian utility, issue a
$1.75 billion sustainability-linked security. Maybe this
an early indicator of a rebound in the market. And
transition bonds may well be a popular theme in the
coming year, with Japan planning a significant ramp
up in transition bond issuance over the next 10 years.
Bloomberg’s Global Aggregate Green, Social and
Sustainability (GSS) bond indices (webinar link) may
provide investors with an objective and robust
measure of the global market for fixed income
securities issued to fund projects with direct
environmental and/or social benefits. The 2023 return
for the GSS index is 9.94%, some 423 bps above that
of the Global Agg Index, highlighting increased returns
for investors with an appetite for sustainability-
focused investment.
For additional insights on the sustainable debt market,
please follow this link.

Visit IN ESG<GO> on the Terminal or browse our

website to find out more about Bloomberg’s
Sustainable Indices and request a consultation with
an index specialist.

The data and other information included in this publication is for illustrative purposes only, available “as is”,

non-binding and constitutes the provision of factual information, ra

Gardiner, J. (2024). Green bonds reached new heights in 2023 | Insights. Bloomberg
Professional Services. [online] 8 Feb. Available at:
https://www.bloomberg.com/professional/insights/trading/green-bonds-reached-new-heights-
in-2023/#:~:text=Bloomberg%20Professional%20Services [Accessed 14 Apr. 2024].

20 February 2024
Taking the pulse of the sustainable bond market
While Moody's analysts aren't forecasting growth in the
sustainable bond market in 2024, rising climate risk, new
technologies and evolving regulatory drivers are likely to
change the market's contours. Adriana Cruz Felix, Matthew
Kuchtyak, Jeffrey Sukjoon Lee and Tobias Lindbergh survey
the evolving landscape.

Environmental Finance: Will last year's sustainable

bond market rebound extend into 2024?
 Matthew KuchtyakMatthew
Kuchtyak: We expect 2024 sustainable bond volumes to be
roughly flat with 2023's $946 billion, despite higher-for-
longer interest rates and moderating economic growth
globally. Our 2024 projection of $950 billion in sustainable
bond issuance includes $580 billion of green bonds, $150
billion of social bonds, $160 billion of sustainability bonds
and $60 billion of sustainability-linked bonds (SLBs).

Our forecast reflects our view that the market resilience

observed during the past two years will extend into 2024.
We expect sustainable bonds' share of overall global
issuance to remain similar to the 14% share achieved in
2022 and 2023.

Several drivers will support sustainable bond issuance this

year, while others may temper growth. Accelerating
investment in emerging green technologies (such as green
hydrogen, biofuels, battery storage, and carbon capture,
utilisation and storage) and an increased focus on transition
finance will unlock issuance in new areas. Despite posing
challenges for issuers, the climate finance gap in emerging
markets will spur new financing approaches and continue to
drive issuance from sovereigns. A gradual shift from
voluntary to regulatory standards will advance this year,
opening up possible avenues for growth, while potentially
delaying others in the near term. Meanwhile, closer scrutiny
of SLB quality may stifle growth in that segment and shift
some issuance to use-of-proceeds labels. Other emerging
trends, such as innovation in sustainable bond structures
and use-of-proceeds categories, will sow the seeds for
future market growth.

EF: What are the key trends you foresee shaping

regional issuance?
MK: Europe will continue to account for the largest regional
share of issuance in 2024. Sustainability issues remain top
of mind for many issuers and investors in Europe, as
regulations such as the EU's Green Bond Standard (EU GBS)
phases in later this year. In North America, the decline in
issuance in recent years may bottom out in 2024, although
the outcome of the US general elections in November will
generate some uncertainty. In Asia-Pacific, issuance has
been growing steadily after nearly tripling in 2021 to $194
billion. A top-down focus on transition finance will be a
hallmark of the region in 2024.

In the Middle East and Africa, regional issuance more than

doubled last year from 2022 levels, bolstered by the
presence of sovereigns – for example, the government of
Sharjah issued $1 billion in green bonds. In Latin America,
high-volume issuers – including sovereigns such as
Colombia, Chile and Mexico – will continue to dominate
activity.

Figure 1: Sixteen sectors with $4.9 trillion in rated debt have high or
very high inherent exposure to carbon transition risk
Source: Moody’s Investors Service

EF: How will emerging green technologies shape the

2024 sustainable bond market?

Jeffrey Sukjoon LeeJeffrey

Sukjoon Lee: The use of sustainable bonds by issuers in
hard-to-abate sectors will accelerate. Sectors with elevated
exposure to carbon transition risk have a total of $4.9
trillion of Moody's-rated debt outstanding, underscoring the
significant potential for increases in future sustainable bond
issuance (see Figure 1). In 2023, issuers in these sectors
accounted for $112 billion of sustainable bond issuance, or
43% of nonfinancial corporate volumes. Around three-
quarters of this issuance came from companies in the
energy and utilities and automotive sectors, where scalable
decarbonisation solutions generally exist today.

In hard-to-abate sectors where low-carbon technologies are

largely not available at scale today – including steel,
cement, shipping and aviation – the roll-out of new
technologies is an important component of sectoral
decarbonisation pathways. Although these sectors have
been relatively minor contributors to sustainable bond
volumes in recent years, the growth of emerging green
technologies could incentivise companies to enter the
market, diversifying sectoral issuance over time.

That said, persistent hurdles stand in the way of widespread

adoption of some technologies. First, some projects
continue to face challenges with respect to economic
returns and scalability, even as policy support improves cost
competitiveness. Furthermore, high-interest rates and
slowing economic growth could impede the financing of
some capital-intensive projects.

Second, technologies in several hard-to-abate sectors carry

potential sustainability quality and comparability risks that
may complicate their inclusion in sustainable financing
frameworks. In the case of hydrogen projects, for example,
carbon-intensity thresholds needed to qualify as green or
clean hydrogen can vary across geographies and standards,
while the use case of the hydrogen produced also has
implications for how effective it is as a decarbonisation
agent.

EF: Will SLB volumes continue to decline amid

global market scrutiny?
 Adriana Cruz FelixAdriana
Cruz Felix: We expect SLB volumes to decline both in
absolute terms and as a share of total sustainable bond
issuance in 2024. SLBs accounted for 7% of sustainable
bond issuance last year, down from 8% in 2022 and 9% in
2021, while SLB issuance volumes dropped for the second
consecutive year, to $10 billion in the fourth quarter, the
lowest quarterly total since the segment began its ascent.

Continued investor focus on the robustness and

achievement of sustainability performance targets and the
materiality of financial adjustments has discouraged some
would-be issuers from entering the market. An International
Capital Market Association report about greenwashing risks
identified the SLB segment's lack of ambition in the early
days of issuance as a contributing factor to questions about
credibility. However, the report also showed that the quality
of SLBs has been improving more recently.

Nevertheless, there remains a gap in quality between use-of-

proceeds and sustainability-linked instruments, in part
because the SLB segment remains at an early stage of
development. Eighty-two percent of the financing
frameworks and instruments assessed under our second-
party opinion (SPO) assessment framework have received
an SQS1 (excellent) or SQS2 (very good) score since October
2022. But there is a clear difference between use-of-
proceeds and sustainability-linked instruments in our SPO
portfolio, with 90% of use-of-proceeds frameworks or
instruments receiving an SQS1 or SQS2 score, while only
56% of sustainability-linked instruments or frameworks have
received one of these top two scores.

As market and regulatory scrutiny intensifies this year, the

exposure to perceived greenwashing concerns could
potentially drive issuers to consider the use-of-proceeds
variety of instruments over SLBs, despite the latter's
flexibility in terms of proceeds allocation.

Figure 2: Use-of-proceeds frameworks and instruments have received

higher Sustainability Quality Scores under Moody's SPO assessment
framework

Data as of 14 January 2024, includes both public and private

SPOs. Source: Moody's Investors Service
EF: Any bright spots you're noticing in the SLB
space?
ACF: Issuers in the market have been significantly focused
on the incorporation of key performance indicators (KPIs)
that target GHG emissions. Through the end of June 2023,
nearly three-quarters of SLBs by count had included a KPI
focused on GHGs.We are increasingly seeing issuers with a
substantial portion of their overall carbon footprint in Scope
3 emissions integrate it into their SLB frameworks as a
standalone KPI.

Issuers are then challenging themselves to commit to

always using together KPIs covering the same sustainability
issue, such as multiple scopes of GHG emissions.

Although challenges exist for the SLB label, new issuers

provide ballast to the still-developing market, drawn in some
cases by the structural appeal of SLBs. About two-thirds of
SLB issuers in 2023 were making their debut in the segment,
accounting for around 47% of SLB volumes globally. First-
time entrants represented 31% of use-of-proceeds issuers in
2023, by comparison, and accounted for just 12% of total
use-of-proceeds issuance.

EF: How will the transition from voluntary to

mandatory best practices impact the sustainable
bond market?

Tobias LindberghTobias
Lindbergh: The sustainable bond market has grown globally
over the past decade, based largely on the development of
market best practices that have created a common
language for determining labelled bond eligibility. However,
a key development to address greenwashing concerns has
been an increased regulatory focus on defining which
projects constitute credible sustainable investments. For
example, the creation of taxonomies around the globe aims
to help facilitate a common set of criteria to define eligible
investments, while providing greater clarity to market
participants. We expect that this gradual shift from market
to regulatory standards will pick up pace this year as more
initiatives take effect.

Potentially, the most consequential of these global

initiatives over the next couple of years will be the phasing
in of the voluntary EU GBS. A key tenet of the standard is its
definition of project eligibility, for which it uses the
definitions established under the EU's Taxonomy of
sustainable activities. There is a flexibility pocket of 15% of
the proceeds specifically for sectors not yet covered by the
EU Taxonomy and other specific activities to support and
promote the standard's usability.

The development of regulatory standards has potentially

delayed issuance in some markets as issuers await
regulatory guidance. For example, the delayed release of the
US Securities and Exchange Commission's climate
disclosure rule, which is now expected later this year, and
its potential inclusion of Scope 3 reporting, has created
some uncertainty for US companies.

Disclosure requirements and reporting standardisation

should broadly help support the growth of the sustainable
bond market, despite some near-term confusion over which
items to disclose and how to report them hindering the
ability of companies to set up sustainable bond programmes.
If they are already disclosing relevant data points as part of
their existing reporting obligations, however, the marginal
time and financial cost of setting up a sustainable bond
programme may shrink.

Matthew Kuchtyak is a vice president and regional manager for Americas second
party opinions for Moody's Investors Service, based in New York, Jeffrey Sukjoon
Lee, is vice president and regional manager for APAC second party opinions,
based in Singapore, and Adriana Cruz Felix is vice president and regional
manager for EMEA second party opinions, and Tobias Lindbergh is senior vice
president and head of second party opinions EMEA and APAC, both based in
Paris.

Environmental Finance (2024). Taking the pulse of the sustainable bond market. [online]
Environmental Finance. Available at: https://www.environmental-finance.com/content/the-
green-bond-hub/taking-the-pulse-of-the-sustainable-bond-market.html#:~:text=Our
%20forecast%20reflects%20our%20view [Accessed 14 Apr. 2024].