Green Bonds Crucial for Climate Finance but Face Multiple Challenges: IEEFA

Despite strong momentum and cumulative issuances topping USD 3 trillion, green bonds continue to face key challenges that threaten their effectiveness as a climate finance tool, the Institute for Energy Economics and Financial Analysis (IEEFA) said in a briefing released Wednesday.

According to IEEFA, green bonds represented only 3% of the global bond market in 2024, with annual issuance crossing USD 577 billion. Yet, their growth is restrained by regulatory hurdles, inconsistent green standards, high issuance costs, and declining investor incentives such as the green premium.

“The credibility and transparency of green bond labelling are central to their effectiveness, but weak monitoring frameworks and the risk of greenwashing pose serious concerns,” said Labanya Prakash Jena, a sustainable finance consultant at IEEFA and one of the report's authors.

The briefing note highlights that divergent definitions of what qualifies as “green,” particularly across jurisdictions, further complicate the landscape. Developing markets often lack access to credible verification mechanisms and sufficient technical capacity, making it harder to meet global standards.

Framework On Green Bonds

While frameworks such as the Green Bond Principles and Climate Bonds Standard provide useful guidance, their varied adoption contributes to market fragmentation, the report notes.

Vandana Vuppuluri, co-author and an alumna of IIM Rohtak, pointed out that the high cost of certification and compliance continues to deter smaller issuers. “The market is increasingly dominated by well-capitalised corporates and sovereigns, leaving little space for smaller players,” she said.

Green Premium

The so-called green premium—historically a key incentive—has also eroded. Once a pricing advantage for issuers, recent data show it has narrowed to between -5 and -2 basis points, and in some cases turned negative, raising doubts over its sustainability.

“Green bonds are a valuable instrument, but they are not a silver bullet for the climate crisis,” Vuppuluri said. “Their full potential can only be unlocked when combined with clear policy direction, effective regulation, and transparent post-issuance reporting.”

The briefing concludes that green bonds remain critical for mobilising private capital but must operate alongside tools like carbon pricing and emissions trading to achieve meaningful climate outcomes.