Despite populist rhetoric to the contrary, there is still great potential in the world of sustainable investment. Looking particularly at sovereign, sub-sovereign and supranational (SSA) sustainable bond markets, improving data quality and a broader, deeper issuer base are enhancing the ability of investors to align their portfolios with both impact and performance.

The sustainable sovereign bond universe is growing in depth and diversity, allowing investors to access more geographies, sectors and impact themes than ever before. The quality of data available to fund managers and investors is also noticeably improving, with issuers able to provide more transparent and specific insights as the impact reporting process becomes standardised.

With more granular data, greater transparency and wider choice of sovereign issuance, fund managers can build portfolios that are clearly aligned with investors’ sustainability targets without foregoing diversification or returns. The toolkit is growing, and so is the opportunity set.

From Iceland to Australia: the expanding map of green sovereign bonds

Last year, many countries made their debut on the sustainable sovereign bond stage. Australia issued its first green bond for $7 billion, the proceeds of which will fund its goals of improved environmental outcomes and climate change mitigation and adaptation¹. The bond was in high demand, with the issue receiving over $22 billion in bids². Iceland also entered the spotlight, issuing its first green bond, which is intended to help the country’s economy become climate-resilient in the years ahead³. Iceland raised €7 billion through this issuance, approximately nine times the issue size, showing the significant investor interest⁴.

This broadening of the issuer base is a positive sign of the growing governmental commitment to sustainable finance to catalyse climate transition plans. With more countries active in the sector, it is increasingly feasible for managers to construct a globally representative portfolio, offering both sustainable alignment and diversified geographical exposure.

Simultaneously, the market is deepening among existing issuers, with countries like Germany, France and Italy building out their green bond yield curves. Other issuers, such as Japan, are also reasserting their positions vis-à-vis climate change and related funding. In 2024, Japan became the first country to issue a sovereign climate transition bond, which will be used to finance the research and development of clean energy resources, as Japan aims to be carbon-neutral by 2050⁵.

The expansion of the sustainable bond map is particularly valuable to fund managers, as it provides greater flexibility in managing duration and positioning within sovereign green debt. It also allows for tactical shifts without having to exit a sustainable theme or reduce exposure to key sovereign issuers.

How better data is shaping the future of impact measurement

Richer, more reliable data is a further reason for optimism in sustainable sovereign bond markets. Historically, reporting on the impact of sustainable bonds has been a manual, opaque process. But this is changing. Enhanced data availability – driven by better issuer reporting, third-party verification and advances in environmental, social and governance (ESG) data analytics – is making it easier to quantify and, therefore, communicate the real-world outcomes of sustainable investments.

As data quality continues to improve, we are moving closer to fund managers attributing by impact, better equipping them to provide investors with detailed insights into how specific fixed income holdings are contributing to climate and social outcomes over time. This is particularly important in a market where transparency and accountability are becoming non-negotiable, driven in part by stricter regulations.

Impact attribution would also allow fund managers to seamlessly assess which bonds are the most effective, allowing for smarter capital allocation and improved internal strategy. We view this as a development that holds enormous potential, not just for reporting, but reinforcing the effectiveness of sustainable fixed income investing.

Greater opportunities in an expanding market

The combination of improving data quality and increased depth and diversity of issuance offers a compelling case for sustainable sovereign bond investors. Regardless of the sombre mood music around ESG, I am strongly optimistic about the sustainable bond market in 2025, driven by opportunities from this improving data and issuer landscape.

The EdenTree Global Sustainable Government Bond Fund’s primary focus is on green, social, sustainable and impact bonds issued by governments and government-related issuers. These use-of-proceeds bonds make up at least 80% of the Fund’s holdings, enabling investors to finance projects that support a reduction in the level of carbon emissions caused by human activities or greater access to services that empower communities.

This document has been prepared by EdenTree Investment Management Limited for Financial Advisors, other intermediaries and other investment professionals only. It is not suitable for private individuals. This document has been produced for information purposes only and as such the views contained herein are not to be taken as advice or recommendation to buy or sell any investment or interest thereto. Please note that the value of an investment and the income from it can fall as well as rise as a result of market and currency fluctuations, you may not get back the amount originally invested. Past performance is not necessarily a guide to future returns.

A full explanation of the characteristics of the investments is given in the Key Investor Information Document (KIID). Any forecast, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are, unless otherwise stated, EdenTree Investment Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all-inclusive and are not guaranteed as to accuracy. There is no guarantee that any forecast made will come to pass.

Sources

1. Green bond of the year - sovereign: Australia's Green Treasury Bond
2. Australia issues inaugural $7 billion green bond | Treasury Ministers
3. Government of Iceland | The Green Bond Framework
4. Iceland Issues Inaugural Green Bond of 750 million Euros - ESG News
5. Japan's first sovereign green bonds expected to attract healthy demand