Feedback SFI has gathered from sustainable bond underwriters suggests there have been several occasions where issuers have received a negative response from investors at the prospect of refinancing existing sustainable bonds without a label. That raises an important question.
If an issuer moves back to conventional funding, will the same investors still be around the table?
And, if some investors are no longer able or willing to participate, could that have implications for demand?
For issuers where sustainable finance supports a wider sustainability strategy, including the financing of transition assets, there is a strong argument for continuing to fund through sustainable instruments.Even if only a proportion of the $2.8tn of maturing debt returns to the labelled market, refinancing could therefore become a meaningful source of sustainable bond issuance through the end of the decade. But refinancing is only one potential area of growth.
More targeted labels
Transition, blue, nature, gender and other more targeted labels are bringing new themes into the sustainable bond market. These instruments allow issuers to link financing more closely to specific sustainability objectives, while giving investors access to more targeted thematic exposures.
Many of these markets remain small compared with green bonds, but they have the potential to broaden the sustainable bond universe and bring new issuers, assets and investors into the market.
Greater regulatory clarity
Regulation could also play an important role.
Greater clarity from frameworks such as the EU Green Bond Standard (EU GBS) and the evolution of Europe's sustainable finance disclosure regime could help create more alignment between issuers and investors. There will inevitably be different views on whether further regulation will support or constrain market growth.
But clearer definitions and expectations could help investors allocate capital with greater confidence and give issuers more certainty when bringing credible sustainable debt to market.
Energy security and geopolitical risks
Energy security has moved higher up the agenda for many economies as geopolitical risks have increased. Renewable generation, electricity grids and wider energy infrastructure will all require huge amounts of capital over the coming years. Much of this investment also aligns naturally with the green bond market.
That overlap between energy security and decarbonisation could become an important driver of issuance as governments and companies invest in more resilient energy systems.
Emerging and new markets
There are also significant financing needs across emerging markets, particularly around infrastructure and the transition. At the same time, public debt-to-GDP ratios continue to rise in some emerging economies, increasing the need to mobilise a broader pool of capital.
Sustainable bonds offer one route to do this. They can help issuers broaden their investor base while directing capital towards clearly defined environmental and social projects. There is also considerable scope for the sustainable bond market to expand into countries and regions where labelled issuance is still at an earlier stage of development.
And then there are data centres
The rapid expansion of AI and digital infrastructure creates another potential financing theme.
Data centres require significant amounts of both energy and water. As capacity grows, so will the need for investment in renewable power, electricity grids, energy efficiency, cooling and water infrastructure. How the market finances the greening of that infrastructure could become an increasingly important part of the sustainable finance story.
The next phase of sustainable bond growth
The $2.8tn maturity pipeline is therefore only one part of the picture.
Refinancing, new labels, regulatory developments, energy security, emerging markets and the growth of digital infrastructure could all shape the next phase of the sustainable bond market.
It will be interesting to see how that mix develops between now and the end of the decade.