Beyond labels: Using green bonds to support investors’ climate-related objectives

For some investors, green bonds represent an important component of their climate-thematic investment strategies. This paper explores the rapid growth and increasing relevance of labeled bonds—particularly green bonds—as instruments designed to provide transparency and traceability of capital allocation to eligible climate‑related projects. The analysis examines market trends, allocation and impact reporting, and the use of frameworks like the International Capital Market Association (ICMA) allocation categories, EU Taxonomy, and Sustainable Development Goals (SDGs) to assess sustainability outcomes.

While these frameworks provide important transparency on how proceeds are used and reported, the paper also examines the structural limitations of relying on labeled bonds alone within a benchmark‑aware portfolio—and how investors might combine green bonds with the broader universe of transition-aligned issuers to build diversified, climate-thematic portfolios.

Climate transition made investable—what are labeled bonds?

According to recent research, labeled bonds can support sustainability-related objectives.¹ Green bonds are the largest part (58% ²) of the global labeled bond universe—other labels include social, sustainable, climate transition, and sustainability-linked bonds, which are aligned with the ICMA Principles for labeled instruments.

Green bonds have gathered particular attention from climate-thematic investors given their proceeds are earmarked for projects with environmental benefits, such as renewable energy, energy efficiency, and climate adaptation. Their use of proceeds (UoP) structure provides a mechanism for transparency and accountability, enabling investors to align capital with sustainability commitments.

From an investment perspective, green bonds offer several key characteristics, including:

• Comparable risk-return profile: When comparing a green bond with a conventional bond from the same issuer with the same currency, maturity and coupon rate, the green bond tends to show similar credit risk and yield characteristics to the conventional bond, making it an efficient way to integrate sustainability-related goals without altering the financial investment objective.³
• Broader investable universe and issuer exposure: The green bond market has grown substantially since the inauguration of the labeled bond market in July 2007 by the European Investment Bank (EIB), supported by strong issuance from other supranational bond issuers, sovereigns, and corporate borrowers, increasing the range of benchmark‑eligible securities available to fixed income investors (Figure 1).
• Sustainable outcome alignment: Green bonds enable investors to allocate capital to projects with intended environmental benefit, while recognizing that reported figures generally reflect the impact of financed projects rather than outcomes attributable to any single investor. ⁴

Over the past decade, regulators and supervisors have focused increasingly on climate-related financial risk ⁵ and related disclosure information while investor demand for positive sustainable outcome investing strategies⁶ and decision-useful information has grown. In parallel, green bonds continue to dominate labeled sustainable debt issuance, reinforcing their core role in the sustainable debt market.

Market overview: A small but rapidly growing market

Labeled debt instruments have gained a significant share in certain parts of the fixed income market. While there may be some differences between data providers in identifying what qualifies as a green-labeled bond, the European green bond market—the largest green bond market globally—has grown to around 15% of the euro investment grade (IG) corporate bond market since 2013 (Figure 1).⁷

Green bonds as a financing tool for climate‑aligned investment

To qualify a bond issue as green under the ICMA Green Bond Principles, the issuer must establish a green bond framework that defines project eligibility criteria, how projects are selected, how outstanding proceeds will be managed and reported, and their contribution to positive sustainable outcomes.⁸

For example, Ørsted, a Danish energy company, issued green bonds as part of a broader financing plan supporting its transition toward renewable energy generation.⁹ Industry peers including EDF, Enel, and Iberdrola have done the same, with labeled green issuances contributing to the financing of activities aligned with their interim 2030 emissions-reduction objectives.¹⁰ Within the transportation sector, Maersk issued green bonds to support investment in energy efficiency measures and replacement of older fossil-fuel-powered vessels with dual-fuel ships capable of sailing on green methanol and other low-carbon alternatives.¹¹

Improved availability and standardization of issuer data has enhanced investors’ ability to assess allocation and reporting practices, providing the foundation for the market analysis presented in the following sections.

Understanding the structure of the labeled bond market

Figure 2 provides an overview of the bond classification of the euro investment grade corporate bond market, showing the relative representation of conventional bonds and labeled use‑of‑proceeds instruments. This context helps frame the subsequent discussion of allocation reporting and project categories within green, social, and sustainability bonds.

Allocation of proceeds: What labeled bonds finance

Figure 3 illustrates the allocation of euro investment-grade corporate bonds across the ICMA-defined project categories, based on reported UoP. Allocation reporting is one of the core requirements of the ICMA Principles.

Within the overall market, the largest allocations to green bond project categories (as a share of the total index) are green buildings (4.19%), renewable energy (3.56%), and clean transportation (1.35%).

For social bonds, allocations are reported against analogous social categories, such as affordable housing and access to essential services. Sustainability bonds combine both green and social project categories.

Figure 4 illustrates the eligibility of reported use‑of‑proceeds allocations according to the EU Taxonomy environmental objectives, providing a supplementary classification lens to the ICMA project categories. It is intended to help investors identify sustainable activities, and can serve as a tool to reduce greenwashing risks by employing a data-driven, scientific approach.

However, the EU Green Bond Standards (EuGBS)¹²  are voluntary and the proportion of UoP reporting as being aligned with the EU Taxonomy at the time of conducting this research remains very low compared to the full universe of labeled bonds. Under the EU Taxonomy, not all business sectors are currently included in the Taxonomy, and an activity is considered environmentally sustainable—or "Aligned" with the EU Taxonomy—if it makes a substantial contribution to one of six environmental objectives and if it does not significantly harm any of the others. In addition, the rules require issuers of bonds aligned to the EuGBS to provide granular reporting data and meet comprehensive screening criteria, which may be deemed too challenging for some labeled bond issuers.

From allocation to reporting: Interpreting impact reporting in labeled bonds

While allocation reporting explains how bond proceeds are used, impact reporting seeks to describe the outputs and outcomes associated with those activities. In the context of labeled bond markets, the term “impact” is commonly used to refer to issuer‑reported output and outcome indicators associated with the use of bond proceeds under the ICMA Harmonized Frameworks for Green and Social Bonds, rather than to denote impact investing as an investment objective or impact measurement as in a Theory of Change framework.

These indicators are typically derived from issuer frameworks and post‑issuance reports and may be re‑structured, aggregated, and pro‑rated by data vendors for portfolio reporting. As a result, reported figures reflect a combination of issuer disclosures and analytical adjustments required to align data across issuers and instruments.

It’s important for investors to distinguish between reported outputs and broader notions of real‑world outcomes. Impact reporting in this context provides indicative measures associated with financed activities, rather than verified measures of outcomes that can be directly attributed to an investor or used as evidence of impact investing.

Reported impact metrics and data availability

Within the context set out in the previous section, impact reporting is typically available for labeled bonds from 12-18 months after issuance. Specialist data providers, such as LGX DataHub, collect impact reporting data from post-issuance reports and apply methodologies to enable comparability across portfolios.

Where issuers do not provide impact metrics on a pro‑rated basis, data providers may apply conservative assumptions or coefficients to estimate the share of outcomes attributable to a given bond. In addition, where no reported data is available, estimated values may be derived using proxy approaches based on comparable instruments. As a result, portfolio‑level metrics may include a combination of reported and estimated data points.

Illustrative examples of impact reporting metrics

Issuer-reported impact metrics, developed in line with ICMA frameworks, provide a structured view of outputs associated with financed activities. Broader frameworks such as the United Nations Sustainable Development Goals (SDGs) offer a complementary perspective for assessing the alignment of these activities with global sustainability objectives. These approaches can be used together to provide additional context on the reported outcomes associated with labeled bond investments.

Figure 5 provides an example of selected ICMA-aligned impact reporting metrics of a euro investment-grade (IG) portfolio derived from issuer-reported and vendor-estimated data.

Of the euro IG corporate bonds in the market, according to our analysis using data from LGX DataHub, 90.7%¹³ of those identified as labeled bonds have some form of reported or estimated impact reporting metric coverage which is either reported by the issuer or estimated by LGX DataHub.

In this example, reported and estimated ICMA-aligned impact reporting metrics indicate that the financed activities are linked to a range of environmental and social outputs, including renewable energy generation, energy savings, and emissions‑related indicators. For instance, the data suggests investments facilitated through the issuance of these bonds is associated with approximately 86.66 tCO₂-e of annual greenhouse gas emissions reduced or avoided per EUR million invested.¹⁴

For illustrative context only, this level of reported emissions reduction or avoidance is broadly comparable to the annual estimated emissions of approximately 65 cars in the EU.¹⁵  Similarly, the reported renewable energy generation of 0.07 GWh per EUR million invested is broadly comparable to the estimated annual electricity consumption of 18 EU-based dwellings.^16,17

In addition to ICMA-aligned metrics, investors may also interpret these outcomes through broader sustainability frameworks such as SDGs.

SDG mapping allows investors to compare sustainability objectives (e.g., climate action, gender equality, clean water) across asset classes and geographies. It’s important to note however that if a project contributes to multiple SDGs, the full allocated amount is counted toward each relevant SDG. In other words, double-counting is possible.

For example, a typical market-weighted euro investment grade portfolio is more aligned with SDGs 7, 11, and 13 than other SDGs, reflecting a focus on clean energy, sustainable cities, and climate action (Figure 6).

Investment considerations and market constraints

While allocation and impact reporting provide important transparency on the use and outcomes of labeled bond proceeds, there remain structural limitations in relying on labeled bonds alone from a portfolio construction perspective. These include the more limited secondary-market liquidity of some labeled issues, pricing differences relative to conventional bonds (the "greenium"), individual issue sizes that may fall below index or benchmark thresholds, narrower currency coverage, and a more limited range of maturities, which together can make it difficult to build a diversified, benchmark-aware portfolio from labeled bonds alone.

Investors may note that, while the default risk of an individual labeled bond is similar to that of a conventional bond from the same issuer, other risk characteristics may differ (e.g., currency risk, maturity risk and liquidity risk) and, therefore, in aggregate, the expected return profiles of a pure labeled bond market allocation (e.g. Bloomberg Global Aggregate Green Social Sustainability Bond Index) can differ versus a typical broad market exposure that includes conventional as well as labeled bonds (e.g. Bloomberg Global Aggregate Index). As a result, a purely labeled bond exposure may not be sufficient for investors seeking both climate alignment and benchmark-aware portfolio construction.

In response to these constraints, investors may consider a range of approaches when constructing climate-aware bond portfolios, rather than limiting consideration solely to qualifying labeled bonds.

Practical steps to build climate-aware bond portfolios

For those investors seeking to use their capital to support the transition to a lower carbon economy, attaining green bond exposure via primary market issuance may represent an effective approach to financing eligible climate‑related activities.

It’s important to note that not all climate‑relevant investments are captured by labeled instruments. Bonds issued by companies actively transitioning toward lower‑carbon business models may also contribute to climate‑thematic objectives, even where the bonds are not formally labeled according to one of the ICMA labeled bond categories.

Because labeled bonds make up only a relatively small share of the investable universe (Figure 1), a portfolio constructed solely from such instruments may differ materially from a broad market benchmark in terms of risk, return, and diversification characteristics. Therefore, investors may consider a broader set of approaches to construct climate-thematic bond portfolios, including:

• Investing in qualifying green-labeled bonds, such as those aligned with recognized frameworks (e.g., the Climate Bonds Initiative Taxonomy)
• Identifying conventional bonds issued by companies aligned or progressing in their transition to net zero

This broader investment framework underpins approaches that seek to balance climate-thematic objectives with portfolio efficiency.