Shrinking Green Premium, Greenwashing Undermine Green Bond Market Potential: IEEFA
Despite surpassing USD 3 trillion in cumulative issuances, green bonds still represent just 3 percent of the global bond market.
July 30, 2025. By Dineshwori
The briefing highlights the challenges associated with green bonds, including regulatory complexities, high issuance costs, greenwashing, shrinking green premium, and inconsistencies in green definitions across jurisdictions.
“Green bond labelling is central to the credibility, transparency and effectiveness of green bonds. However, green bonds face significant challenges that can undermine their efficacy – most notably, greenwashing,” said Labanya Prakash Jena, consultant for sustainable finance at IEEFA, and one of the authors of the briefing note.
“The absence of robust monitoring and reporting mechanisms exacerbates greenwashing, and addressing this is important to ensure that green bonds achieve their intended purpose of financing genuinely sustainable projects,” Jena emphasised.
These challenges are compounded by inconsistencies in how green bonds are defined, verified, and reported across jurisdictions. In developing economies, limited access to data, technical expertise, and credible verification services make it challenging to meet the stringent reporting obligations tied to green bonds.
“While frameworks such as the Green Bond Principles by the International Capital Market Association and the Climate Bonds Standard have gained international recognition, their adoption and interpretation vary across markets. Inconsistent standards increase the risk of fragmented markets,” said co-author Vandana Vuppuluri, an alumna of the Indian Institute of Management, Rohtak.
One of the main attractions for issuers—the green premium, or cost advantage associated with green bond issuance—also appears to be fading. Recent studies suggest that the green premium is shrinking, averaging between -5 and -2 basis points, and in some cases, has even become negative. This trend raises questions about raise questions about its long-term effectiveness.
The authors also highlighted the high costs associated with issuing green bonds. While green bonds carry reputational benefits and may attract a broader base of environmentally conscious investors, the expenses involved in compliance, certification, and reporting can be prohibitive for smaller entities. This has created an uneven playing field, largely restricting green bond issuance to well-resourced corporates and sovereigns, the IEEFA noted.
Perspectives on green bonds also vary based on stakeholder objectives, with issuers seeking financial and reputational benefits, investors aiming for sustainable financial returns, and market participants analysing the green premium from different perspectives. It is challenging to meet the objectives of all three stakeholders.
“It is important to remember that the green bond market is relatively small compared to the broader bond market, limiting investment opportunities. Transparency is also an issue as obtaining clear, consistent post-issuance reports on the environmental impact of projects can deter investors,” cautioned Jena.
While green bonds help mobilise private capital for environmentally beneficial projects, the IEEFA emphasised they cannot replace instruments like carbon pricing, emissions trading schemes, or direct regulation. Their impact is maximised when paired with clear policy signals and robust governance frameworks.
“While green bonds are not a standalone solution for climate change, they are essential to financing a low-carbon transition. They are most impactful when paired with broader climate policies and financial strategies. Ultimately, their success depends on the interplay between market mechanisms, regulatory frameworks, and stakeholder commitment to environmental goals,” Vuppuluri added.
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