New players, new rules: why the green bond market is on the cusp of change

It’s been 18 years since Aldo Romani at the European Investment Bank introduced the world to the idea of a green bond. Since then, a lot has changed. The green bond market is now broader – it includes sustainable and sustainability-linked instruments.

In the first half of the year, the cumulative volume of GSS+ bonds stood at $6.2trn.

That’s according to data collected by Climate Bonds Initiative (CBI), a non-profit. Since 2010, CBI has played a defining role in mainstreaming green bonds. At CBI’s annual gathering in London, stakeholders across the green bond ecosystem gathered to reflect on where the market is headed next.

Amongst those taking the stage in London, were investors who have allocated an increasing share of their capital to these instruments in recent years.

Times, investors say, are changing. New issuers, new financing structures and new rules of the game are shaping the next frontier of green bonds.

New issuers

CBI’s chief executive and co-founder Sean Kidney kicked off the day’s proceedings with a spirited address. “If we want to get the beasts of finance moving, we need to make sure that this is about creating opportunity”, said Kidney.

“The reallocation of capital is the job of our times”, he added.

Kidney’s view was that part of the reallocation would come from redefining what counts as a climate investment. For green bonds, this means figuring out which hitherto untapped territory green bond markets might venture into.

Investors speaking at a subsequent panel had some answers. “There are new issuers coming to the market from hard-to-abate sectors”, said Christina Bastin, a portfolio manager at Man Group.

Jake Goodman, a senior sustainability investment analyst at Federated Hermes had a similar story to tell. “Labelled issuance from brown sectors is incredibly important”, he said.

Ashwin Joshi, head of sustainability for global fixed income at BlackRock agreed. In addition, Joshi pointed out that new issuances are also coming from emerging markets.

“There is no transition without emerging markets”, Joshi said as he noted the strong issuance growth in these economies.

Investor confidence

Issuance growth is linked to investor confidence. Blackrock, Joshi told the audience, has over a decade of experience managing green bond mandates.

Drawing on that experience, Joshi said, “what we have consistently seen from asset owners is that green bonds are seen as one of the cleanest ways of deploying capital into the energy transition”, he said.

Federated Hermes’ Goodman agreed. “For European sustainable fixed income funds”, he said, “we are on 12 consecutive quarters of inflows”.

Investor confidence in green bonds and the assets they pour into seems to have survived the ESG backlash in the US. “There might be trouble on the harbour, but the currents underwater are absolutely flowing in the right direction”, said CBI’s Kidney.

New bonds, new rules

The consequence of new issuers entering the market coupled with a confident array of investors to welcome them, is the prospect of new instruments to structure that interaction.

From the recently announced Tokyo Metropolitan Government’s resilience bond to Denmark’s £800m twin bond, innovations in financing structures and instruments will characterise the next era of green bonds.

So too will new regulations, most notably product labelling regimes such as SFDR which is currently undergoing reform. “We hope that SFDR will be different than SDR because SDR is difficult to implement”, said Malika Takhtayeva, sustainable fixed income lead at BNP Paribas Asset Management.

Takhtayeva made the case for transition bonds (bonds issued by hard-to-abate industries to fund their transition) to be covered under a separate label.

Discussions over the labelling reforms framed the issue as a choice between a rules-based approach or a principles-based one.

Man Group’s Bastin defended the value of a principles-based approach. “Having principles is a good anchor”, she said before adding, “There’s a healthy tension between having rules and them being principles-based”.

If conversations of CBC 2025 are anything to go by, the green bond market is headed towards new horizons. One characterised by new issuers, new instruments and new rules. As this era of green bond markets gets underway, for issuers and investors alike, change is very likely to be the only constant.