The market for green bonds – essentially instruments that raise funds for new and existing projects that help achieve environmental and climate objectives – is growing exponentially. According to the World Economic Forum (WEF), some $270 billion was spent on green bond issuances in 2020; the market was expected to hit $1 trillion by the end of last year. These bonds will be powerful financial instruments in funding the green transition as countries seek to meet ambitious climate objectives.
Yet as they increased in popularity, there were very real risks of “greenwashing”, where projects linked to bonds were spun as being far more environmentally friendly than they were in reality. Regulation has finally caught up with activity in this market, however; EU legislation now provides strong protection against greenwashing.
Green bonds are now categorised as “use-of-proceeds” financing, meaning the bond issuance proceeds are ring-fenced for a defined, “green” project, explains Jonathan McKeown, director of ESG at Davy Horizons, Davy’s sustainability and ESG advisory team.
“Green bonds are generally issued by governments – sovereign bonds – semistate entities and corporates,” says McKeown. “Green bond pricing is equivalent to ordinary bonds. However, in the case of increased investor demand more appealing pricing on a green bond can be achieved for the issuer.”
In fact, often there is excess demand for green bonds. “A very recent issue by KfW, a German state-owned investment and development bank, was three times oversubscribed, while the first NextGenerationEU green bond in 2021 was 11 times oversubscribed,” says Dr Fabiola Schneider, assistant professor in accountancy at University College Dublin.
This means there can be a “greenium”, where investors are willing to pay a premium for green bonds due to their green preferences. In 2022 the ECB published a paper adding to evidence of a greenium in the corporate bond market, showing that green bonds offer issuers cheaper funding.
“However, the authors emphasise that credibility – both of the issuer and the financial instrument – is crucial,” says Schneider. “This underscores the need for robust standards like the newly introduced EU green bond standard. The paper also reveals that the greenium became more pronounced during the years 2016-2021, likely driven by shifting investor preferences and growing awareness of climate concerns and transition risks.”
McKeown says green bonds offer several benefits for the issuer, including highlighting green assets or businesses, creating a positive marketing narrative and diversifying the investor base by attracting ESG (environmental, social, and governance) and RI (responsible investment) specialist investors.
“For the investor, returns can be similar to a ‘vanilla’ bond but with the added benefit of supporting the transition to a less carbon-intensive economy,” he says.
The European green bond standard entered into force in Ireland in December 2024.
“This particular regulation aims to specifically address greenwashing and improve investor confidence by ensuring green bond proceeds genuinely support projects with significant environmental benefits aligned with the EU’s climate targets,” McKeown explains.
“This means ‘green’ is now defined by EU law,” adds Schneider. The voluntary standard links proceeds of green bonds to the EU taxonomy for sustainable activities, the EU-wide classification system that aims to combat greenwashing.
The proportion of bond issuance that can be called green varies widely across EU member states. In 2023 the share of green bonds was highest in Denmark, Sweden and Finland, for which green bonds represented more than 16 per cent of bond issuance. Interestingly, Ireland was ranked seventh, or above average.
Schneider also points out that it is important to distinguish between corporate (issued by firms) and sovereign (issued by countries) green bonds. In 2023 corporations accounted for 76 per cent of the total value of green bonds issued in the EU, reaching nearly €200 billion. Supranationals such as the European Investment Bank, which issued more than €13 billion of Climate Awareness Bonds in 2023 and the European Commission, which issued over €12 billion of NextGeneration EU Green Bonds in 2023, can also issue green bonds.
The Irish Sovereign Green Bond (ISGB) Framework was published in September 2018. The most recent annual allocation saw €521 million directed to eligible green projects in March 2024. These included projects across the six eligible green categories set out in the ISGB Framework and include built environment and energy efficiency, clean transportation, climate change adaptation, environmentally sustainable management of living natural resources and land use, renewable energy, and sustainable water and wastewater management
The European green bond standard and the EU taxonomy for sustainable activities are intended to boost sustainable investment, Schneider says. “These developments indicate green bonds will likely represent a growing portion of the overall bond market in the future.”
Europe has always been the home of sustainable finance, she adds. “In 2023, more than half of green bond volume originated from Europe, with an over 20 per cent growth compared to the previous year,” she says. “The euro is the main currency for green bond issue. Therefore, while current political developments in the US are noteworthy, they are unlikely to significantly disrupt the broader green bond market.”
And while the new US administration has committed to reducing federal investment in clean energy, this is at least partially offset by private-sector initiatives and state-level efforts.
Indeed, overall demand for green, social and sustainability-linked bonds continues to increase, says McKeown.
“With the introduction of assured non-financial data, and corporate transition planning becoming more common and rigorous, the credibility and greenwashing concerns investors once had will have been resolved,” he says.
