Sustainable financing: navigating a new paradigm
Sustainable finance is evolving, with trends like climate adaptation and transition finance taking hold, highlighting the market’s breadth and increasing sophistication in weathering a turbulent spell for issuance.
The global sustainable fixed income market has hit a rough patch: a combination of politicised rhetoric from the current US administration and challenging fundraising conditions has cooled issuance. But beneath the surface, there are clear signs that the market is as vibrant as ever and rapidly maturing.
The numbers tell one side of the story. Sustainable bond issuance hit roughly US$1.2trn in 2024 but is expected to land just below US$1trn this year, according to Nomura.
While the decline is a concern, it is hardly reflective of a market in crisis. Rather, overall momentum is holding steady. Total cumulative issuance since the market’s inception surpassed US$6.9trn by the end of 2024, according to the Climate Bonds Initiative1 – a significant milestone.
In the first half of the year, around US$486.4bn of GSSS bonds were issued globally, according to LSEG data, with sovereigns, supranationals and agencies leading the charge. European issuers dominated volumes, accounting for 53% – with the share of Asia-Pacific borrowers expected to grow from its current 26% – while green bonds have been the most popular product.
“The sustainable market is robust and in good shape,” says London-based Jarek Olszowka, international head of sustainable finance at Nomura. “Even if it’s not going to be a stellar year for volumes, it will in no way be a bad year because the backdrop in Europe and Asia Pacific is supportive.”
The US is, admittedly, the wildcard. Much of the pessimism surrounding environmental, social and governance (ESG) factors stems from the current US political landscape.
Nevertheless, a US pullback from sustainability is unlikely to alter broader market dynamics.
According to Morningstar2, this is because 85% of all sustainable assets under management (AUM) are concentrated in Europe – making it the engine of global sustainable investing – with the US accounting for a modest 10% of total AUM. And although European sustainable funds recorded net outflows of US$7.3bn in the first quarter of 2025, the first quarterly outflow since 2018, they rebounded strongly in the second quarter, netting an estimated US$8.6bn in positive flows. A nuanced view is essential: the first quarter outflows were small relative to the US$3trn in sustainable assets in Europe and were mainly driven by the underperformance of sustainable equity funds. In contrast, sustainable bond funds experienced inflows.
This raises an important question: where does the market go from here?
Maturing market
Green bonds continue to drive the labelled bond market, and social and sustainability bonds play a role, too. Sustainability-linked bonds, meanwhile, are facing something of an existential threat amid questions around the soundness of these deals and scrutiny into the quality of SLBs’ key performance indicators (KPIs).
But conversations with issuers and asset managers have evolved significantly in the past year. The focus has turned to four areas, says Olszowka: transition bonds, blue bonds, climate resilience and adaptation, and funding of security and defence.
The interest in transition bonds has been fuelled by the Japanese government’s innovative green transformation (GX) bonds. The idea behind transition bonds is to help firms in hard-to-abate sectors by providing clear decarbonisation pathways. Japan’s ministry of finance has already raised around ¥3.3trn (US$22bn) from these transition bonds, while numerous domestic corporations have also tapped the market – making Japan a frontrunner for transition financing. The entire GX programme is seeking to mobilise ¥150trn in private and public investments to achieve the decarbonisation of Japan’s real economy.
Blue finance is in the limelight, too. The Indonesian sovereign recently sold blue bonds in the Japanese Samurai debt market, as did marquee names like the Asian Development Bank in an earlier issuance – notable given the funding gap to support healthy oceans is getting wider every year. Nomura played a bookrunning role on both deals.
Climate adaptation and resilience are rapidly moving up the agenda as well. They pose challenges as the impact of the underlying projects is often harder to quantify than mitigation and carbon emission reduction initiatives, but they are nonetheless essential when thinking about future-proofing assets. These projects are increasingly included within broader sustainable bond frameworks.
In May, Nomura worked on a US$1bn sustainable development bond for the Asian Infrastructure Investment Bank, where proceeds were earmarked for sustainable infrastructure projects, reflecting AIIB’s mandate and thematic priorities – which includes green infrastructure and climate action, including climate adaptation.
According to Crystal Geng, ESG Research Lead, Asia, BNP Paribas Asset Management, the main topic of discussion in the short term will be on climate mitigation, including renewable energy and the value chain around battery and other technology. While adaptation is also important, she believes multilaterals and SSAs will play an outsized role here rather than corporates.
Moving forward
As market participants make headway on their decarbonisation plans in the run up to COP30 in Brazil in November, sustainable financing tools are expected to remain firmly on the radar.
“It’s not gloom and doom,” says Olszowka. “The sustainable market is strong both on the issuance and demand side and maturing by the day. All the pieces are there, which sends a positive signal to the market.”
1 Climate Bonds Sustainable Debt Global State of the Market
2 Global Sustainable Fund Flows Quarterly Data | Morningstar
PRODUCED IN ASSOCIATION WITH NOMURA