Green Bonds Rising: A Market Transformation

The green bond market has undergone remarkable growth and evolution, becoming a central pillar in sustainable finance. The BIS Quarterly Review from March 2025 provides precise data on both market growth and environmental impact.

Why It Matters:

• Market Growth and Structure: The total value of outstanding green bonds reached $2.9 trillion in 2024, a significant increase from approximately $500 billion in 2018. In 2024, the annual issuance of green bonds is estimated at $700 billion, though the global investment required for climate change mitigation is closer to $2 trillion per year.

• Geographically: The Euro area and the United States account for around 50% of the total outstanding green bonds. Among emerging market economies, China is the clear leader in green bond issuance.

• Currency: Green bonds are predominantly issued in euros and U.S. dollars, though renminbi-denominated bonds are gaining market share.

• Non-financial corporations: Including those in carbon-intensive sectors, dominate the green bond market, accounting for an impressive 43% of the total outstanding as of 2024. Financial institutions come next, holding 38%, while the official sector accounts for 19%.

Details

The BIS report clearly shows that there is a trading premium on green bonds compared to traditional bonds that share otherwise identical characteristics. This provides a cost benefit to issuers. This premium is most pronounced for bonds issued by investment-grade companies. The premium varies depending on the term structure of the bonds. Two main factors drive this premium: preference channels, where investors favor environmentally responsible firms, and risk channels, where carbon-intensive companies are seen as default risks.

The BIS research establishes two critical relationships through regression analysis:

• Policy-Issuance Correlation: A one standard deviation increase in aggregate climate policy stringency is associated with approximately 2.4% higher annual issuance of green bonds. Sectoral policies have the strongest correlation, with a one standard deviation increase in stringency linked to nearly 3% more green bond issuance.

• Emissions Reduction Effect: Using a panel data set of 736 green bond issuers (991 green bond issues) during 2011-2022, the research shows:

  • Scope 1 emissions intensity decreased by approximately 21% on average one year after a firm's first green bond issuance.

  • Reductions were statistically significant up to three or more years after issuance.

  • Heavy emitters showed the most pronounced improvements, with firms in carbon-intensive sectors achieving significantly lower emissions intensity while firms in other sectors showed smaller reductions.

  • Firms in the highest emissions intensity quintile before issuance reduced their emissions significantly, while those in the lowest intensity quintile did not.

  
  

It is clear that green bonds act as a credible indicator of broader corporate commitments to emissions reduction, particularly among the highest-impact emitters. By issuing green bonds, companies make it known to investors, regulators and the public that they are not only committed to sustainable practices, but are also actively working to reduce their carbon footprint. This is especially evident in sectors with the highest emissions intensity, where the issuance of green bonds is clearly driving significant improvements in emissions management.

Green bonds are a tool for aligning financial incentives with environmental goals. It is hoped that a signaling effect will influence other companies in carbon-intensive industries to adopt similar practices, creating a ripple effect throughout the economy that will drive further reductions in global emissions.