Green and Sustainable Bonds Can Help Portfolios and the Planet

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Continued diversification within the green and sustainable-labelled debt market is broadening the climate investment landscape for fixed income investors, leading to attractive investment opportunities.

Also, vanilla bonds from issuers with strong climate credentials provide an additional pool of impactful investment beyond labels.

As these markets continue to develop, they create new pathways for real-world decarbonisation while widening the investment universe for those seeking meaningful environmental impact.

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Dissipating 'greeniums' and competitive performance

We believe the steady issuance of green bonds has resulted in limited trade-offs for fixed income investors when opting for green bonds over their vanilla counterparts.

According to Bloomberg New Energy Finance (BNEF), so-called greeniums — the additional new issue premium attributed to a bond's green label — are dissipating on a global average basis.

For instance, in the case of assessing sovereign twin bonds (a financial instrument where a government issues a green bond alongside a conventional (non-green) bond that has identical financial terms), greeniums have reached record lows, with premiums steadily compressing over time and displaying reduced volatility. This is according to the Anthropocene Fixed Income Institute (AFII).

In addition, sustainable bonds compare favourably to conventional fixed income bonds, with the Bloomberg Global Aggregate Green Social Sustainability Bond index outperforming the Global Aggregate index in 2025, according to Bloomberg Intelligence.

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Why green bonds are still attractive

Green bonds remain the label of choice in the sustainable debt market to finance environmental projects and assets, representing close to 40% of transition finance globally, according to BNEF.

The green bond market has grown to more than $3 trillion in total outstanding market value as of January 2026, according to Environmental Finance, with 2025 green bond issuance surpassing 2024 issuance as referenced in Bloomberg Intelligence. Notable drivers include differentiation in terms of issuer type and geography.

Sovereign, supranational and agency (SSA) issuers and securitisations have significantly driven 2025 issuance, jointly accounting for almost 40% of green bond volumes in 2025, according to Bloomberg Intelligence.

These volumes and more diversified bond maturities from SSAs, alongside some new issuers, are helping broaden the opportunity set for multi-sector investors to finance climate-related and environmental projects.

For example, at year end 2025, approximately 70% of sovereign issuers held in the Bloomberg Global Aggregate Index have now issued in green or other sustainable-labelled formats, according to Environmental Finance.

SSAs often play a pivotal role in driving innovation of bond formats and establishing best market practice for other issuers.

For instance, Japan's issuance of Climate Transition Bonds has been reflected by an uptick in Japanese corporations issuing under the transition bond label, with the transition bond market recording strong issuance at the start of 2025.

Across the Asia Pacific region, green and other sustainable bond issuance reached over $320 billion in 2025, according to Bloomberg Intelligence, driven by activity from China. This highlights the broadening universe and potential for global asset managers to invest with a climate lens.

Multilateral development banks are also increasingly focusing their attention on "originate-to-share" models that provide new channels, including via securitisation, to free up more capital and provide credit enhancements and risk mitigation for emerging markets lending.

While not all labels and formats may be appropriate for every product, such innovation is welcome, as it helps expand the investment opportunity set for responsible fixed income investors and allows each investor to focus on those instruments that best align with their specific climate-related objectives.

Climate-focused investment beyond labels

The size of the green bond market, and the associated regional, issuer, sector and maturity coverage of the available universe of securities, allow responsible fixed income investors to construct diversified sustainable portfolios.

This labelled universe can be augmented with vanilla bonds from issuers with robust climate credentials, further enhancing economic diversification for investors and the potential long-term positive environmental impact.

Identifying "dark green" issuers — those representing the highest standards of environmental commitment — can be vital, particularly as some are moving beyond labelled debt.

For example, one multinational energy company is phasing out issuance in sustainability-linked and green bond formats, having integrated robust sustainability commitments into its core business strategy, underscoring the importance of thorough issuer-level analysis to capture opportunities across the wider climate investment landscape.

Final thoughts

The green and sustainable bond market remains a compelling space for investors, offering a blend of attractive investment opportunities, diversification in issuer types and innovative formats.

The expansion of the opportunity set for climate-focused managers to explore investment beyond labels, with a focus on issuers' overall climate strategies and performance, enables the construction of portfolios that are both diversified and impactful from a sustainability perspective.

These drivers consolidate the potential of the green and sustainable bond market for those seeking both financial returns and positive environmental impact.

This article is presented for informational purposes only and should not be construed as investment advice, a recommendation to purchase or sell specific securities, or to adopt any particular investment strategy. The views and opinions expressed are those of the author and are subject to change at any time without notice due to market or economic conditions and may not necessarily come to pass. The information does not address the financial objectives or specific needs of individual investors. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) and its subsidiaries and affiliates (collectively "the Firm") and may not be reflected in all the strategies and products that the Firm offers.

Investing involves risk including the risk of loss. Past performance is no guarantee of future results.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Vishal is a managing director of Morgan Stanley Investment Management, Head of the Broad Markets Fixed Income team and a portfolio manager. He is responsible for buy-and-sell decisions and portfolio construction. He joined Calvert Research and Management's predecessor organization, Calvert Investment Management, in 2012. Eaton Vance acquired Calvert Investment Management in 2016. Morgan Stanley acquired Eaton Vance in March 2021. Vishal began his career in the investment management industry in 2005. Before joining Eaton Vance, he was a senior vice president, portfolio manager and head of taxable fixed income for Calvert Investments.