1.3 How sustainable finance is going mainstream, fast
· 10 min read
This article is part of the Sustainable Finance Guide, a new series by Globalfields in collaboration with illuminem. Together, we provide readers with clear, educational insights into where sustainable finance stands today and how it is evolving to support nature, regeneration, and long-term resilience.
Global flows into Paris-aligned financial investments have grown exponentially over the last decade, signalling a substantial acceleration in sustainable finance across the world.
This growth has been catalysed by the 2015 Paris Agreement’s call for the alignment of finance flows with pathways towards low greenhouse gas emissions and climate-resilient development. As illustrated in Figure 1, global sustainable debt issuance rose dramatically from just over USD 50 billion in Q1 2018 to an impressive USD 409 billion in Q1 2024. Much of this growth is driven by the rapid uptake of green and sustainability bonds, reflecting growing confidence in sustainable finance.
Figure 1: Global sustainable debt issuance by instrument (billions of US dollars) [1]
Private climate finance flows, investments which aim at reducing emissions and increasing resilience of human and ecological systems, have also seen substantial growth. Sectors such as clean energy systems and sustainable transport have seen investment rise by USD 56 billion and USD 194 billion, respectively, between 2019 and 2022.
This growth is not accidental. It’s the result of structural shifts in how global finance operates.
Several key structural drivers underlie this growth. One of the most powerful drivers has been policy and regulatory action. The European Union’s 2018 Sustainable Finance Action Plan (followed by measures like the Sustainable Finance Disclosure Regulation and the EU Taxonomy) has transformed how investors account for environmental, social and governance risks.
These regulations have called for greater transparency and accountability, as well as created a new financial system where sustainability is deeply embedded, not optional. Such policies, alongside national green finance strategies in other regions, have created a supportive framework that heightens investor confidence in channelling more capital into sustainable assets.
Another significant catalyst was the global response to the COVID-19 pandemic. As governments sought to rebuild, green and social investments took centre stage in recovery packages. This can be seen in the growth of instruments such as sustainability bonds. Additionally, this top-down policy push was matched up with bottom-up forces. Indeed, investor demand for sustainable and ESG-labelled products soared. This was driven both by value alignment and the solid financial performance of sustainability funds in the face of market volatility.
The momentum continues to build. As shown in Figure 2, the past two decades have experienced meaningful milestones. From the adoption of the Equator Principles by leading international banks, to the issuance of the first sustainability-linked bond in 2019 by the Enel Group. These moments could mark progress and suggest a shift in how capital is raised, allocated and managed.
Figure 2: Timeline of key sustainable finance milestones
Sustainable funds are mutual funds with exchange-traded funds (ETFs) that integrate sustainable development-related considerations in their asset allocation process.
As of 2024, the total global issuance of sustainable funds has reached nearly USD 3.2 trillion, with Europe leading at 84% (approximately USD 2.7 trillion), followed by the US at 11% (approximately USD 344 billion), and the rest of the world holding just 5% of global market share. Since 2015, the market has increased by more than 90%, while the number of sustainable funds has more than quadrupled [2].
Yet, momentum has slowed in recent years.
From 2021 to 2024, net inflows have declined, driven by regulatory and policy uncertainties, dampened enthusiasm and rising anti-ESG sentiment (particularly in the US), elevated interest rates, and the financial underperformance of ESG strategies. In 2024, the median returns of sustainable funds were 0.7% less than traditional funds at 0.8 and 1.5% respectively [3].
Despite this, there are strong reasons not to undermine the resilience of this market. Recent mandatory climate disclosure regimes and rising investor demand for decarbonisation may continue to underpin sustainable fund growth. Moreover, the decline in net inflows mirrors broader fund market trends in 2025, with investors generally shifting to more risk averse strategies amidst macroeconomic uncertainty.
It is too early to draw conclusions over the performance of sustainable funds in 2025. Institutional investor surveys by BNP Paribas and Morgan Stanley indicate that both institutional and retail investors remain committed to sustainable investing [4].
Over the long term, sustainable funds have proved their worth. A hypothetical investment of USD 100 dollars in a sustainable fund in December 2018 would have grown to USD 136 by February 2025, compared to USD 131 for a traditional fund in the same period. This is a testament to the ability of ESG-integrated investments to remain competitive over time despite market fluctuations [5].
Another key tool in the sustainable finance ecosystem is the GSS+ bond market which includes green, social, sustainability, and sustainability-linked bonds.
Of these, green bonds are the largest component of sustainable debt issuance and serve as instruments whose proceeds are exclusively applied to green projects. This includes renewable energy, energy efficiency, clean transportation, climate change adaptation, green buildings, and terrestrial and aquatic biodiversity conservation, as defined by the Green Bond Principle (GBP) framework.
Social bonds fund projects with positive social outcomes, while sustainability bonds intentionally combine both environmental and social objectives, equally subject to their own practices and guidelines. Meanwhile, sustainability-linked bonds are a relatively new, performance-based instrument, tying coupon payments to the issuer's achievement of ESG targets. Though constituting only a very small portion of the GSS+ market, they offer an exciting potential [6].
While the GSS+ bond market has seen explosive growth over the last decade, some argue the recent picture may be slightly mixed.
According to the Climate Bonds Initiative (CBI), GSS+ bonds aligned with Climate Bonds’ methodologies have now surpassed USD 6 trillion outstanding, up from just USD 2 billion fifteen years ago [7]. Further, the UN Trade and Development’s World Investment Report 2025 also claims sustainability bonds reached a record high in 2024, growing from USD 157 billion in 2023 to USD 206 billion, with USD 5 trillion of cumulative issuance of GSS+ bonds since 2019 [8].
However, growth within the GSS+ bond categories is not uniform. Social bonds, which peaked at USD 283 billion in 2020 due to COVID-19 recovery packages, have declined by over USD 100 billion, despite a marginal year-on-year improvement. Similarly, sustainability-linked bonds are also stalling amid concerns over weak targets and enforcement declining by 64% [9].
Despite these setbacks, the broader market remains resilient.
While social and sustainability linked bonds are shrinking by a combined compound annual growth rate of -4%, the consistent performance of green and sustainable bonds continues to drive the sector forward [9].
Figure 3: Global green bond issuance by region (billions of US dollars) [10]
Europe is the undisputed global leader in sustainable finance. It manages over 80% of global sustainable fund assets, issues more than half of all green bonds and has pioneered sustainable finance regulation through the EU Taxonomy, CSRD, Green Bonds Regulation and more.
Additionally, central financial institutions continue to commit to green and sustainable investment despite global uncertainty. The European Investment Bank, for example, issued EUR 19.9 billion in Climate and Sustainability bonds in 2022, increasing its green proportion from 21% - 45% year‑on‑year [11].
Europe proves that when public ambition meets private capital a coordinated, robust ecosystem can make sustainable finance viable and central to financial markets.
North America, particularly the US and Canada, represents the second largest market share of sustainable funds and ranks third globally in sustainable debt issuance. But this region now stands at critical crossroads.
At the federal level, the Securities and Exchange Commission (SEC)’s climate disclosure rules and the Inflation Reduction Act continue to channel investment into green project categories, particularly clean energy. Corporates have also taken bold steps, with the Bank of America committing USD 1.5 trillion in sustainable finance capital by 2030, of which USD 741 billion has been deployed in just four years [12].
However, regulatory volatility threatens to unravel progress.
Political pushback of ESG at the state level (especially in Florida), and the new administration’s potential rollback of the Inflation Reduction Act have cast uncertainty over the future of sustainable finance in the US. In the short-term, these dynamics could disrupt tax incentives, reduce investor confidence, and slow momentum in climate-aligned capital.
Asia-Pacific has rapidly become the second-largest issuing region of sustainable debt. In 2024, Japan became the region’s top issuer after a sharp decline in China’s issuance linked to real estate pressures. Overall, green bond issuance has remained stable, with China and Japan each accounting for 7% of global issuance in Q1 2024, ranking joint fourth worldwide [13].
Asian inflows into sustainable funds remain healthy, albeit from a relatively low base, led by South Korea, Taiwan, and Thailand. Taiwan’s ETF market expanded rapidly, while Thailand’s tax incentives for ESG funds significantly boosted investor participation. Lastly, China returned to modest sustainable fund inflows in Q1 2025 after prolonged outflows, aligning with record ETF inflows in 2024.
With continued policy support, Asia-Pacific is set to become a key driver of global sustainable finance.
While progress varies, momentum is emerging across developing and underrepresented regions, though each presents their unique barriers and opportunities.
Middle Eastern markets remain comparatively underdeveloped in sustainable finance. ESG adoption is constrained by limited disclosure, fragmented regulations, and geopolitical complexities. However, culturally aligned innovations like green sukuk instruments, particularly sovereign issuances in Gulf states such as Saudi Arabia and the UAE, highlight the potential for faith-based and region specific financial instruments to advance sustainability. (See Article 5.2 for more detail)
In Latin America, sustainable finance is gradually advancing, driven by sovereign and corporate green bonds in Mexico, Chile, and Brazil, representing the three largest GSS+ markets in the region by volume issued in 2022. Nevertheless, fragmented regulation and limited investor awareness pose barriers [14].
Finally, Africa’s sustainable finance market is still emerging, with notable green bond issuances in Nigeria, Kenya, and South Africa. Critical challenges include weak policy frameworks, low market transparency, and currency volatility. Notably, multilateral support, such as the African Development Bank’s Green Bond Programme, is fostering growth, with the bank being the continent’s premier issuer, issuing 18 green bonds from 2013-2024 with a combined value of USD 4.1 billion [15].
Sustainable finance is crossing the threshold from niche to norm. However, major challenges still remain, such as regional disparities, political resistance, and market volatility continue to halt or slow down the momentum.
These hurdles also present a powerful call to action.
Capital markets should continue to be rewired to reflect planetary and social realities. With the correct enabling environment, these regions could unlock a wave of sustainable finance that could redefine how capital supports the environment. The question is no longer whether sustainable finance will shape the future of global finance, but how quickly it can scale, deepen, and deliver the transformational change the climate crisis demands.
The views expressed are for informational purposes only and do not constitute financial, legal, or investment advice.
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