Growth in the sustainable bond market has stalled, but experts don’t foresee refinancing issues. The demand for green debt securities remains high.
With Donald Trump’s return to the White House, the market for green investments has also changed. Trump’s policies run counter to the global trend toward sustainability and have hindered growth in the sustainable bond market. Last year, more than 1000 billion dollar worth of green, social, and sustainability-linked bonds were issued. So far this year, however, issuances have fallen by about 10 percent, said Jessica Zarzycki, lead portfolio manager for fixed income at Nuveen, in an interview with Investment Officer.
Zarzycki expects the market to rebound, ending the year roughly on par with 2024 levels. Europe continues to lead, accounting for around 50 percent of the primary market. One reason for the slowdown, Zarzycki noted, is that it has become more expensive for European companies to issue bonds in dollars.
The sharpest slowdown, however, is occurring in the US investment-grade corporate bond market. “US companies point to ongoing market uncertainty caused by President Donald Trump’s erratic policies,” said Zarzycki. Still, the underlying business case remains largely intact. “The key message stands: investments in renewable energy remain profitable in the long run. We view the current caution more as a matter of postponement than cancellation.”
Zarzycki noted that there is still strong demand for sustainable bonds in the US, Europe, and increasingly in Asia. “Investors want to make meaningful strides toward sustainable portfolios, and the bond market is particularly well suited for that, alongside private equity,” she said. She pointed to the success of recent issues: “A Korean bank recently launched a sustainable bond that was ten times oversubscribed. In Europe, German utility RWE issued a green bond a few weeks ago, which was also multiple times oversubscribed.”
Solid credit quality
Zarzycki won’t say whether new issues still carry a premium compared to conventional bonds. “The greenium is difficult to quantify but is probably just one or two basis points.” Still, there are clear benefits for companies issuing sustainable bonds. “First, they can attract new investors and diversify their funding sources. And when companies invest in specific sustainable projects that generate stable medium-term cash flows, they may eventually benefit from lower risk premiums.”
Next year, about 400 billion dollar in green, social, and sustainable bonds will need to be refinanced, Zarzycki estimated. Including broader categories of so-called sustainable debt—such as bonds aligned with sustainability goals but not strictly labeled—the total rises to around 1000 billion dollar, according to Bloomberg. Zarzycki emphasized that Nuveen focuses on the labeled market, where proceeds are directly allocated to sustainable projects with measurable outcomes.
Governments, supranational organizations, and other public-sector-related institutions account for the lion’s share of this market—examples include the European Investment Bank and the World Bank. “Utilities and banks will also continue to issue many green bonds. We expect around 800 to 1000 billion dollar in new bonds annually, keeping the market size at least stable,” Zarzycki added.
On the demand side, Zarzycki also saw no difficulties. “Investors want to be sure they’re being adequately compensated for credit risks, and that’s generally the case in this segment. Issuers tend to be of above-average quality and can easily refinance themselves—whether in the sustainable or conventional bond market.”
US Treasuries
According to Gerard Moerman, head of fixed income at Aegon Asset Management, demand for sustainable bonds remains strong, especially in Europe. “We all want to move toward a more sustainable world, and these bonds are one of the ways to achieve that. There’s still a lot of capital waiting on the sidelines, and both sustainable and conventional bond issuances are being oversubscribed. Sustainable bonds are particularly popular, so refinancing problems are unlikely,” he said.
Aegon’s client portfolios already contain many sustainable investments, partly due to European regulations, and interest remains high, Moerman added. “For example, our Spanish clients often request that their standard portfolios include a minimum share of sustainable investments. That can include sustainable bonds but also bonds from companies we’ve awarded a sustainability label. We take a holistic approach so we’re not dependent on companies that issue specific green bonds—since those are mostly financials, utilities, and real estate firms. We see major impact potential in other sectors such as industry, for instance by supporting the transition to green steel.”
Moerman also notes growing investor interest in sustainable government bonds. Here too, Aegon takes a holistic approach rather than limiting itself to the labeled bond universe. “Based on the United Nations Sustainable Development Goals, we assess countries’ progress on sustainability. Only those performing well make it into our investment universe,” he said. “After Donald Trump withdrew from the Paris Agreement, we downgraded the US and excluded US Treasuries from our dark green bond fund. Countries like Finland and Portugal don’t issue green bonds, but they score very high on sustainability. Those are precisely the countries we want to finance.”