How green bonds are shaping the future of sustainable investment

Green bonds and sustainability-linked financing are key drivers in the global transition to a net zero, climate-resilient economy. With rising investor demand and evolving regulatory frameworks, these financial instruments can unlock much-needed infrastructure investment opportunities for cities and nations to finance transformative solutions.

The truth is, if we want to ensure a just transition to a future of well-being for all, we need to finance sustainable action fast and at a wide scale. To this end, cities, towns, and regions need to adopt innovative and sustainable finance mechanisms as they strive to finance local action and catalyze meaningful change. 

Such mechanisms enable local and regional governments to attract and secure investment for their sustainability projects, such as decentralised renewable energy and sustainable transport, ensuring greenhouse gas emissions are reduced and resilient infrastructure is developed or retrofitted. Sustainability, impact, and green bonds are examples of widely used financial mechanisms that mobilize the capital needed for climate and sustainability projects. In particular, green bond investors directly finance the issuer’s climate or environmentally-linked targets and projects (even pipelines) and, over time, the issuer repays investors with interest.

Why green bonds are gaining momentum

Investor demand for sustainable investments is expanding, driven by evolving environmental, social, and governance criteria and regulatory frameworks. Today, the investment market is increasingly prioritizing sustainable approaches that improve loan structures, finance standards, and accountability measures. Such market growth is also supported by improvements in transparency and prevention of greenwashing. In turn, this expansion requires regulatory support to strengthen confidence in the evolving system, which stimulates investors’ demand for sustainable finance mechanisms, particularly green bonds. 

In 2025, in fact, the issuance of sustainability-linked bonds is expected to exceed USD 1 trillion due to a favorable interest-rate environment and ongoing demand for sustainable investment options. Following on the rapid expansion in 2020, the sustainability-linked loan market is stabilizing. Impact bond issuance totaled USD 939 billion in 2023 (3% increase from 2022), while green bond issuance in emerging markets surged by 45% to USD 209 billion. A 7.1% annual increase through 2025 is forecast, to reach approximately USD 240 billion. 

Sovereign issuers including Brazil (USD 2 billion sovereign sustainable bond), India, Kenya, and South Africa continue to tap into the sustainable finance market, issuing multiple green and sustainable bonds to support national climate strategies. Similarly, local and regional governments at the forefront of climate action have successfully leveraged these financing mechanisms, such as Kyoto (Japan), Tanga (Tanzania), Cape Town (South Africa), and Gothenburg (Sweden) – the latter as the world’s first city to issue a green bond. 

Current challenges 

Harmonizing definitions and taxonomies for green bonds remains critical. While innovative taxonomies such as the Climate Bonds Initiative Resilience Taxonomy leverage sustainable investment, the International Finance Corporation urges streamlined frameworks, noting the existence of over 30 different taxonomies that add an extra layer of complexity to investment decisions. The EU is now working to simplify its sustainable finance framework, enhancing market transparency and cutting corporate reporting burdens by about one-third. However, while practical, such simplifications risk undermining years of framework development.

Private and public money to finance climate action

Green bonds will continue to be essential, as public and private finance alone cannot meet global demands: Despite commitments from developing countries to triple climate finance to USD 300 billion by 2035, a significant financing gap persists. Finance experts estimated in 2024 that emerging and developing countries, excluding China, will need USD 1.3 trillion by 2035 to support climate change mitigation, adaptation and resilience efforts. Bridging this gap requires multilevel public and private sector efforts, with sustainability-linked and green financial products playing a pivotal role, also at the local level. 

Public sector finance and private investments remain essential, especially given the diverse and dynamic financing landscape offering a range of opportunities – from traditional grant-making to innovative financial instruments. 

Thinking about issuing green bonds?

ICLEI’s recent Green Innovative Finance webinar series outlines a set of recommendations for subnational governments and their territories on issuing green bonds and capitalizing on the vast range of available opportunities. From Japan to Sweden and across Africa, green bonds are especially beneficial for local governments, helping to finance essential sustainable infrastructure projects while driving socio-economic benefits and enhancing climate resilience

The following aspects are key when considering green bonds:

1. Transparent regulatory processes: A robust monitoring system and clear communication improve transparency. This is needed to ensure projects meet sustainability targets and stay on track. Third-party verification of projects, transparent financial reporting and tracking systems, concise communication messages, and developing local borrowing markets help to enhance credibility and reduce institutional and currency risks. 
2. Developing a sound green finance framework: A clear financing framework ensures that bond issuance is well-governed and aligned with sustainability goals. It should integrate local policies with green finance instruments, and align with global good practices to enhance investor confidence.
3. Project preparation: A robust pipeline of projects linked to sustainability and climate action policies is essential. To develop an investment-ready project (pipeline), project preparation must ensure finance is efficiently allocated and all necessary technical, environmental, and socio-economic assessments are conducted in line with national and international standards and investor requirements.
4. Understanding the bond market: A solid credit rating and strong financial credibility will attract investors. As such, entities with a clear track record of transparent financial audits are preferred by investors. Also, early and active engagement with potential investors can foster confidence and align expectations with market trends. Promoting the intention to issue green bonds – such as through structured investor roadshows – can drive demand and improve pricing outcomes. Additionally, diversifying finance sources helps mitigate financial risks and enhances resilience.
5. Expanding capital markets: Support the adoption of policies aligned with international standards that expand domestic capital markets to attract diverse investors interested in sustainability portfolios. Efficient capital use requires leveraging cost-saving procurement strategies such as lowering borrowing costs through pooled financing, resilience bonds, and innovative finance models – check how the best practice of Sweden’s Kommuninvest unlocks new funding opportunities here. 

ICLEI helps local and regional governments navigate the intersection of this complex, diverse, and dynamic financing landscape, effectively scaling their impact and achieving their sustainability goals and climate targets. Please contact ICLEI’s Innovative Finance experts for guidance and potential collaborations: tap@iclei.org

This piece was written by Jaume Marquès Colom, Senior Officer of Innovative Finance, with contributions from Natalia Salazar, Head of Innovative Finance, and Maryke van Staden, Director of ICLEI’s carbonn Climate Center, and edited by Matteo Bizzotto, Senior Officer of Global Communications.