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Bonds used to finance activities that address climate change and environmental issues - green bonds - provide a means to increase green investment. Green bonds account for only 0.3% of all bonds issued by corporations and governments in the European Union in 2014. This rose to 9.2% in 2022, then fell to 6.8% in 2023. Trends reflect growing interest in offering financial products that support sustainability and demand among investors to finance environmentally sustainable projects. Issuances of green bonds are likely to increase given the ambitious environment and climate goals of the European Green Deal.

Figure 1. Green bonds as a percentage of total bonds issued by corporations, by governments, and by both corporations and governments in the EU-27, 2014-2023

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The European Green Deal emphasises the need to direct capital flows to green investments. One way to achieve this is by issuing green bonds, which, supported by the EU Sustainable Finance Framework, raise finance for projects, assets and specific business activities that help achieve environmental and climate objectives.

Green bond issuance increased significantly in the EU between 2014 and 2023, from 0.3% to 6.8% of total bonds issued. This indicates an increasing demand to finance sustainable investments, driven in part by the European Green Deal and the need to fund the transition to a low-carbon, green economy.

Green bonds can be issued by various types of entities. The rates at which these entities have increased green bond issuance vary. In recent years, green bond issuance by corporations increased rapidly, from 4.7% of total corporate bonds issued in 2020 to a high of 11.1% in 2022, before falling to 7.1% in 2023. The share of green bonds issued by governments (sovereign bonds) increased from 1.9% in 2020 to 5.9% in 2023. In 2023, corporations accounted for 76% percent of the total value of corporate and government green bonds issued in the EU, reaching €197.3 billion .

The volume of green bonds issued by some supranational entities also fell in 2023. The European Investment Bank issued €13.15bn of Climate Awareness Bonds in 2023, down from €13.73bn in 2022 and the European Commission issued €12.46bn NextGenerationEU Green Bonds in 2023, down from €24.44bn in 2022. This drop does not reflect a trend as both supranationals are following a multianual plan.

The recent dip in the green bond market may be due to short-term economic conditions. Rising interest rates increased borrowing costs in 2021, making it less attractive for green projects with high upfront investments to secure financing via bonds.This led to a reduction in green bond issuance, causing the green segment of the primary bond market to shrink and hindering its overall growth in 2023.

Interest rates are beginning to fall across Europe and the demand for green bonds is expected to pick up again driven by the ambitious environmental and climate objectives of the European Green Deal. Conditions for sustainable finance are also improving. The European green bond standard, which entered into force in December 2023, and the EU taxonomy for sustainable activities aim to boost sustainable investment. These developments indicate green bonds are likely to account for a growing share of total bonds in future.

Figure 2. Shares of green bonds issued by corporations and by governments in 2023, by EU Member State

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Green bond issuance as a share of total bond issuance varies across the EU Member States. In 2023, the share of green bonds was highest in Denmark, Sweden and Finland, for which green bonds represented more than 16% of bonds issuance. In contrast, six Member States did not issue any green bonds in 2023, namely Bulgaria, Czechia, Estonia, Greece, Cyprus, and Lithuania.

The speed at which national green bond markets develop and mature depends on many variables, including policy and regulatory factors, market conditions and financing trends. Further growth in the issuance of green bonds across the EU faces a range of challenges, including fragmented capital markets in Europe, insufficient pipelines of standardised green projects ready for green bond funding, and a lack of domestic investors .

Differences in investment needs and a lack of commonly accepted green bond standards and definitions add to the challenges and lead to green bond markets of different scales across the EU. The European green bond standard aims to overcome some of these barriers and boost the share of green bonds in domestic (i.e., national) markets.