Deep dive: green bonds & blended finance - a buyer's guide: how to evaluate solutions

Executive summary

Green bonds and blended-finance instruments have become central to funding large-scale decarbonisation projects in emerging markets. Global issuance of green, social, sustainability and sustainability-linked (GSSS) bonds topped $1 trillion in 2024, yet their share of total fixed income issuance dropped to 2.2 % as conventional debt markets grew. In emerging markets outside China, GSSS bonds now account for over 5 % of all bond issuance, with renewables absorbing half of the proceeds. New standards such as the ASEAN Green Bond Standards and the EU-China Common Ground Taxonomy align local frameworks with the EU taxonomy and drive issuance. At the same time, innovative instruments like green sukuk—which make up about 10 % of the $180 billion sukuk market—are bridging Islamic finance and green bond investors through joint guidance from IDB, ICMA and the London Stock Exchange. Despite this momentum, buyers face challenges: issuance in emerging markets fell 14 % in 2024; market penetration remains low relative to the USD 3.6 trillion sustainable funds universe; and infrastructure pipelines are constrained by currency risks and regulatory uncertainties. This guide helps engineers navigate these complexities.

Why it matters

Decarbonising emerging economies requires trillions of dollars in long-term capital. Green bonds mobilise debt specifically earmarked for climate and environmental projects, while blended finance combines public or concessional funding with private investment to de-risk and catalyse deals. These instruments can lower borrowing costs, attract global investors and enable projects that would otherwise struggle to secure finance. However, green financing remains a small slice of overall bond markets—just over 5 % of issuance outside China—and definitions and standards vary widely. Ensuring that proceeds truly support mitigation or adaptation projects requires robust taxonomies, monitoring and reporting. Engineers evaluating projects must understand how emerging standards like the ASEAN Green Bond Standards align with EU taxonomy rules, and how blended finance structures allocate risk and returns. Understanding the market can unlock low-cost capital for infrastructure, buildings, transport and industrial decarbonisation.

Key concepts and market fundamentals

What are green bonds?

Green bonds are debt instruments whose proceeds finance environmental projects such as renewable energy, low-carbon transport, energy-efficient buildings and biodiversity conservation. Their defining feature is use-of-proceeds: borrowed funds must be allocated to eligible green projects, tracked separately, and reported on. Green bond principles, developed by the International Capital Market Association (ICMA), provide voluntary guidelines covering four components: use of proceeds, project evaluation and selection, management of proceeds, and reporting. The EU Green Bond Standard (EuGB) goes further by requiring at least 85 % of proceeds to be spent on taxonomy-aligned activities, mandating pre-issuance factsheets and external review, and annual impact reporting. Emerging markets increasingly align with these rules: the ASEAN Green Bond Standards, launched in 2018, draw from ICMA principles and specify how issuers must demonstrate compliance, while Indonesia’s 2023 Green Bond and Sukuk Framework aligns with both ICMA’s principles and the ASEAN standards.

What is blended finance?

Blended finance uses concessional capital—grants, first-loss guarantees, subordinated loans or junior equity—to crowd in private investors. It reallocates risk so that commercially oriented investors can fund projects that have positive environmental or social impacts but may not meet traditional risk-return thresholds. Blended finance deals often involve multilateral development banks or development finance institutions (DFIs) providing credit enhancements or guarantees, while private lenders supply senior debt. The IFC defines blended finance as using concessional funding and risk-sharing instruments to catalyse investments that would not otherwise occur. Instruments include first-loss guarantees, subordinated loans, junior equity and currency swaps. Such structures are common in large renewable energy or infrastructure projects where currency and policy risks deter private capital. When designed well, blended finance can leverage multiples of private capital for each dollar of public funds, but complex reporting and lack of standardisation can impede replication.

Market trends in emerging economies

• Volume and penetration: Global GSSS bond issuance reached more than $1 trillion in 2024. In emerging markets, however, issuance declined 14 % year-on-year due to macroeconomic headwinds and weaker Chinese volumes. Outside China, GSSS bonds now account for a record >5 % of overall bond issuance.
• Renewables and corporate leadership: Renewables absorbed 50 % of green bond proceeds in 2024, with buildings and transport accounting for much of the remainder. Utilities and energy firms dominate corporate issuance, representing 60 % of non-financial corporate GSSS bonds.
• Regional dynamics: China’s share of emerging-market GSSS issuance fell from 76 % in 2018 to 41 % in 2024 as Latin America and the Middle East gained ground. The Latin America & Caribbean region leads social bond issuance, while East Asia (excluding China) drives sustainability bonds.
• Standards and taxonomies: The establishment of regulatory frameworks has a strong positive effect on issuance. An analysis of 70 emerging markets shows that after launching a green bond framework, the average number of green bonds issued per country increased seven-fold. Emerging-market regulators are adopting ASEAN’s taxonomy and the EU-China Common Ground Taxonomy to harmonise definitions.
• Green sukuk: Total sukuk issuance reached $180 billion in 2024, with green and sustainable sukuk representing around 10 % of the market. Major issuances include Indonesia’s 30-year green sukuk, Saudi Arabia’s $5 billion issue and the Islamic Development Bank’s $2.5 billion sustainability sukuk. In April 2024, guidance on green, social and sustainability sukuk was jointly prepared by the Islamic Development Bank, ICMA and London Stock Exchange to harmonise principles and attract conventional investors.

Value pools across sectors

Green bonds and blended finance support a variety of sectors. The most active and investible segments include:

1. Power & renewables: Half of EM green bond proceeds fund renewable energy projects. Engineers should look for bonds financing grid-connected solar, wind or geothermal plants with clear environmental benefits and credible monitoring and reporting. Blended finance can de-risk early-stage projects by providing first-loss guarantees or subordinated debt.
2. Buildings and energy efficiency: Buildings account for the second largest share of proceeds. Bonds may finance green mortgages, energy-efficient retrofits or district cooling systems. In emerging markets, local banks often partner with DFIs to offer blended finance that subsidises interest rates or provides risk-sharing for developers.
3. Transport and mobility: Sustainable transport—including metros, electric buses, and rail—takes a sizeable share of funds. Green sukuk have been issued for rail projects in Malaysia and Indonesia. For buyers, evaluating lifecycle emissions and alignment with national transport plans is critical.
4. Industrial decarbonisation: Hard-to-abate sectors such as cement and steel are beginning to issue green bonds for efficiency upgrades or low-carbon fuels. Corporate issuers often combine bond proceeds with concessional loans or guarantees to manage technology risk.
5. Nature and agriculture: Latin American issuers increasingly use green bonds to fund sustainable agriculture, reforestation and water projects. Standards like the ASEAN Taxonomy allow biodiversity and adaptation projects to qualify. However, such projects require rigorous monitoring to demonstrate impact.

Practitioner insights and examples

To illustrate how green bonds and blended finance work in practice, here are examples from emerging markets:

• Indonesia’s sovereign green sukuk (2024): Indonesia issued a 30-year green sukuk as part of a multi-tranche offering, demonstrating investor appetite for long-tenor, Sharia-compliant green instruments. Proceeds funded renewable energy, energy efficiency and sustainable transport projects.
• Saudi Arabia’s $5 billion sustainability sukuk (2024): Saudi Arabia priced a record $5 billion sustainability sukuk to finance green and social projects, showing the depth of the Middle Eastern market.
• Islamic Development Bank’s $2.5 billion sustainability sukuk (2024): The multilateral issued a large sustainability sukuk that follows guidance jointly prepared by the IDB, ICMA and the London Stock Exchange.
• Chile and Mexico’s sovereign green bonds: Latin American governments have been among the most active issuers of green and sustainability bonds, contributing to the decline of China’s share.
• Philippines’ blue finance guidelines and biodiversity bonds: The Securities Commission in the Philippines issued blue finance guidelines in 2023, encouraging bonds that finance ocean conservation and resilience projects.

What’s working

• Frameworks drive issuance: Establishing green bond frameworks boosts issuance by a factor of seven. Countries that adopt ASEAN or EU-China taxonomies see increased deal flow and larger average transaction sizes.
• High-quality disclosures: External reviews, second-party opinions and annual impact reports enhance investor confidence. EuGB rules requiring taxonomy alignment and impact reporting are becoming a gold standard.
• Blended finance innovation: DFIs are increasingly using first-loss guarantees, subordinated debt and currency hedging to crowd in private capital, particularly for renewable energy and infrastructure projects. These tools share risk and reduce borrowing costs, making marginal projects viable.
• Green sukuk guidance: The 2024 joint guidance for green, social and sustainability sukuk provides a familiar framework for conventional investors, facilitating cross-border capital flows.

What isn’t working

• Market volatility and low penetration: Despite record issuance, GSSS bonds remain a small share of total fixed income markets (2.2 % globally and 5 % in emerging markets outside China). Weak macroeconomic conditions and high interest rates have curtailed issuance.
• Uneven adoption of standards: Many countries lack domestic taxonomies, leading to inconsistent definitions and difficulties comparing bonds. Even within ASEAN, some issuers continue to use local frameworks that differ from the ASEAN and EU standards, creating confusion for investors.
• Greenwashing and reporting gaps: Not all bonds labelled "green" meet robust standards. Without uniform reporting and verification, investors risk financing projects with limited environmental benefit. Social and sustainability-linked bonds have faced criticism for weak penalty structures and vague targets.
• Limited project pipelines: Emerging markets often lack bankable green projects due to capital market depth and currency volatility. Blended finance can help, but complex structuring and scarce data constrain replication.

A quick evaluation framework

Engineers evaluating green bond or blended-finance opportunities can use this seven-step framework:

1. Check taxonomy alignment: Confirm that the bond or loan aligns with recognised taxonomies (ASEAN, EU, national) and qualifies under established project categories. Look for at least 85 % of proceeds going to eligible projects.
2. Assess project selection and management: Review how the issuer selects, evaluates and manages projects. Examine the criteria, due diligence process and monitoring plan.
3. Scrutinise reporting and verification: Ensure there is a clear plan for annual impact reporting and external verification. EuGB bonds require pre-issuance factsheets and third-party reviews.
4. Analyse risk sharing and blended structure: For blended finance, understand how public funds or guarantees mitigate risks. Identify whether you are investing in senior or subordinated tranches and evaluate currency hedging.
5. Consider financial terms: Compare yields with conventional bonds. While the “greenium” in emerging markets has largely vanished, high-quality bonds may still price tighter. For sukuk, assess Shariah compliance and liquidity.
6. Evaluate issuer creditworthiness: Investigate the issuer’s balance sheet, existing debt, and track record in managing green projects.
7. Look for co-benefits: Prioritise transactions delivering social or biodiversity benefits, as regulators increasingly require these (e.g., Philippine blue bonds). Projects with clear co-benefits may command stronger investor demand.

Fast-moving segments to watch

• Transition-category bonds: Taxonomies such as the Singapore-Asia taxonomy include “transition” categories, enabling financing for projects that reduce emissions but are not yet fully green (for example, gas-to-power plants or hybrid vehicles). Expect more issuance as economies decarbonise heavy industry.
• Blue and biodiversity bonds: New guidelines in the Philippines and Latin America encourage financing for ocean conservation and biodiversity projects. These bonds can expand the market beyond climate mitigation and adaptation to include natural capital.
• Green sukuk interoperability: The new joint guidance for green, social and sustainability sukuk could accelerate issuance across the Middle East and Southeast Asia, especially if sovereign guarantees or blended finance reduce risk.
• Local-currency bonds and hedging solutions: Growing local investor demand is driving issuance in local currencies. Innovations in currency swaps and hedging instruments can help issuers access foreign capital while protecting against volatility.

Action checklist for engineers

1. Map standards and taxonomies relevant to your jurisdiction and sector, including ASEAN, EU, national, and Shariah guidelines.
2. Identify pipeline projects that meet eligibility criteria and can demonstrate clear environmental benefits and co-benefits.
3. Engage with DFIs and guarantors early to explore blended finance structures and secure risk mitigation.
4. Develop robust data systems to track use of proceeds and impact, enabling transparent reporting.
5. Pilot with smaller transactions to build internal capacity before scaling up.
6. Build local partnerships with regulators, second-party opinion providers and verifiers to ensure compliance and credibility.

FAQ

Why has issuance in emerging markets declined even as global green bonds reach records?

Emerging-market issuers face higher borrowing costs and currency volatility, which suppress appetite despite strong long-term drivers. Chinese issuance declined due to cheaper onshore funding, and macro headwinds slowed activity.

Is there still a “greenium” in emerging markets?

The greenium—or yield discount—is minimal or absent in many emerging markets as supply has caught up with demand. Pricing depends more on credit quality and currency than green labels.

How do green sukuk differ from green bonds?

Green sukuk share the same use-of-proceeds principles but must comply with Islamic finance rules. The market is growing, with guidance prepared by IDB, ICMA and the London Stock Exchange to standardise issuance.

Are social and sustainability-linked bonds equivalent to green bonds?

Not exactly. Social bonds fund projects with positive social impacts (e.g., affordable housing or healthcare), while sustainability-linked bonds tie coupon payments to corporate ESG targets. These instruments are subject to different guidelines and have faced criticism for weak penalties and ambiguity.

What role do domestic investors play?

Domestic investors are increasingly important: local-currency issuance now accounts for over 40 % of sustainability-linked bonds. Engaging local pension funds and insurers can deepen markets and reduce currency mismatch risks.

Sources

• Climate Bonds Initiative. (2024). Global GSSS bond issuance and market penetration report 2024. Climate Bonds Initiative.
• Climate Bonds Initiative. (2024). Sector allocation of green bond proceeds: Renewables and utilities analysis. Climate Bonds Initiative.
• ASEAN Capital Markets Forum. (2024). ASEAN Green Bond Standards and EU-China taxonomy alignment. ACMF.
• Climate Bonds Initiative. (2024). Emerging markets GSSS issuance: Regional dynamics and China's declining share. Climate Bonds Initiative.
• Islamic Development Bank, ICMA, & London Stock Exchange. (2024). Green, social and sustainability sukuk guidance. IDB/ICMA/LSE.
• International Finance Corporation. (2024). Blended finance instruments and risk mitigation strategies. IFC.
• ICMA & IDB. (2024). Cross-jurisdictional taxonomy alignment for green sukuk. ICMA.