Sustainable bonds poised for growth, but standards remain a potential bottleneck

A recent study estimates that green, social and sustainability bond issuance may reach €1.6tn in just four years, but also highlights concerns on standards and the liquidity of the market.

Green, social and sustainability bonds will account for half of all bonds issued in Europe by 2026, according to new research from consultants PwC.

Total GSS issuance in 2026 is expected to reach between €1.4tn and €1.6tn, thanks to rising interest from both investors and issuers. The upper figure would represent 50 per cent of all bond issues in Europe, says PwC's ESG Transformation of the Fixed Income Market report.

Of the investors surveyed, 88 per cent plan to increase their allocation to GSS bonds over the coming 24 months. Meanwhile, 84 per cent of issuers plan to increase their offering of GSS bonds over the same period. The findings were based on a survey of 100 finance or ESG executives at bond issuers and 100 institutional investors, including sovereign wealth funds, pension funds, insurers and banks.

The Luxembourg Stock Exchange leads the GSS bond market, but the London Stock Exchange and Euronext are also major GSS trading venues. Andrew McDowell, PwC Strategy partner in Luxembourg, says the findings show Europe could cement its position as the world’s leading GSS bond market.

Public sector GSS bonds have dominated issuance to date, but McDowell says private sector issuance is set to increase as companies look to the fixed income markets to raise capital for sustainable projects while burnishing their ESG reputations. However, the report also finds both investors and issuers have lingering concerns about both the liquidity of GSS bonds, and the standards and regulations around them.

Finding a balance for standards

“Standards do cause concerns, particularly for investors,” says McDowell, who co-authored the research report. “There were a number of things coming through in the survey – a lack of good reporting, confusion about the use of proceeds from GSS bond issues, differing standards. There is a theme of ‘could we be caught up in some type of scandal that would damage our reputation?’.”

The bonds specify that funds raised will be used on a specific GSS project. Currently, several recognised standards exist, with the most popular in Europe being the International Capital Market Association’s green bond principles and those of the Climate Bonds Initiative, as well as standards issued by the European Union. The EU is currently preparing a Green Bond Standard that will link to its own ESG taxonomy (the system that defines green and social assets and underpins sustainable investing rules), but this is also expected to remain voluntary.

"The EU is obviously tightening up on the use of proceeds, and that has to be taxonomy aligned. They’re prescribing the type of reporting that has to be done, both pre-issuance and post-issuance, and they’re saying most of the reporting has to be assured externally by third parties. All these things are extremely welcome and, in my view, will increase investor demand,” says McDowell.

But he believes the work involved in meeting the EU GBS will increase transaction costs and might deter smaller issuers. The deterrent effect of too tight a standard is a concern for CBI chief executive Sean Kidney. Overall, he says, the EU GBS regulation is welcome and will help drive investors and issuers in the GSS bond markets.

But, he adds, the EU taxonomy is overly complex: “The EU taxonomy has too much in it. It has to be practical and there is work to do on that. The market will grow anyway, but the taxonomy could be problematic.”

Meanwhile, McDowell believes there is also room for improvement in the wider market of sustainability-linked bonds. Unlike GSS bonds, which specify that proceeds will be dedicated to a green project, SLBs are not connected to a particular project. Typically, the terms mean interest payments to investors rise if those sustainability key performance indicators are not met.

McDowell notes that many investors did not want this structure, in which they receive high returns if the issuer fails to meet sustainability targets. “Investors want to have sustainability, so it’s just not the right incentive structure,” he says.

The SLB market has also grown rapidly, although it remains concentrated in Europe. While the PwC report predicts a promising future for SLBs, it also notes that the evolution of these instruments will could be affected by the wider regulatory environment and the uptake of GSS bonds.

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