Declines in labelled loan issuance may be as much to do with macroeconomics as sustainability policy, and transition guidance could provide the market with a boost, says Moody's Ratings Adriana Cruz Felix, Matthew Kuchtyak, Jeffery Sukjoon Lee and Swami Venkataraman.
Environmental Finance: What are the key trends in the labelled loan markets so far in 2025, and how do they vary by region
Adriana Cruz Felix: As the graph shows, there's been a very steep decline in volumes of labelled loans, based on Environmental Finance Data figures, down 52% from the first half of 2024 to the first half of 2025. That decline is steeper than the labelled bond market and is visible across all regions. While the declines have been similar across all types of labelled loans, we are still seeing around $80 billion of sustainability-linked loans (SLL) written in each of the first two quarters of 2025, holding their share of the loan market. Despite the decline and market scrutiny, there is still substantial interest from the market in this type of instrument.
Matthew Kuchtyak: It is also worth noting some differences between regions and types of instruments. Although labelled loan volumes in North America fell over 50% in the first half of 2025 compared with the same period last year – in line with the global trend – volumes actually increased in the second quarter of this year compared to the first. This was the only region where that happened. Another unique regional trend is that despite labelled bond volumes in North America paling in comparison to those in Europe in recent years, labelled loan volumes in the region have actually been nearly as large as those in Europe, a trend that continued into the first half of this year.
Jeffery Sukjoon Lee: The Asia Pacific was not immune from overall weak labelled loan volumes in the first half of 2025. We have observed that a number of existing labelled borrowers have dropped the label in recent months due to limited financial benefits, such as green premiums or discounts, which in turn do not always balance with the additional operational burden the borrowers face. Other macroeconomic uncertainties, changes in policy sentiment and ample liquidity have also incentivised borrowers to focus on traditional financing.
Quarterly sustainable loan volumes by label, in billions
EF: What factors do you believe are driving the decline in sustainability-linked loan volumes?
ACF: The SLL market, much like the sustainability-linked bond (SLB) market, remains under investor scrutiny regarding the ambition of sustainability targets and the financial materiality of these instruments. Consequently, borrowers are exercising greater caution in selecting key performance indicators (KPIs) that are materially significant to their business operations and that effectively address their key negative environmental and social impacts. This careful selection process can lead to longer structuring times for these instruments.
MK: Part of this decline is also likely a reflection of some companies reprioritising the role sustainability considerations play in their capital markets strategy at the moment. In addition to a more challenging policy environment for many borrowers, a macroeconomic environment marked by greater uncertainty around tariffs and defence and energy security has been a feature of the first half of the year. Given that labelled instruments can involve potentially significant costs in terms of time to establish credible instruments and associated reporting mechanisms, it's likely that several borrowers may have opted for traditional financings for the time being. This may well reverse over the months and years to come.
EF: Within Moody's Ratings second-party opinion (SPO) portfolio, how does the quality of labelled bonds compare to labelled loans?
MK: I preface this by noting that a lot of the SPOs we provide are at the framework level rather than the instrument level, and sometimes those include both bonds and loans. But we've tried to tease out as best we could some of the differences in the trends that we see.
One thing to note across bonds and loans is that, generally speaking, use-of-proceeds instruments have a higher degree of quality than sustainability-linked instruments: nearly 90% of use-of-proceeds frameworks and instruments that we've assessed achieve one of the two highest sustainability quality scores (SQS) – SQS1 (excellent) or SQS2 (very good) on our five-point scale. For sustainability-linked frameworks and instruments, that falls to about two-thirds.
When we look purely at individual SLLs, only about half of that subset is an SQS1 or SQS2. So there is a greater share of SLLs that are falling a little bit further down the scale in terms of quality.
There are likely several reasons for that. First is the relative nascency of the sustainability-linked space, where issuers and borrowers are navigating less well-established market best practices than those seen on the use-of-proceeds side. Another potential driver is the largely private nature of the loan market, which often features bilateral structuring of instruments that might work for the lender and the borrower, but might not necessarily reflect broader investor views, as would typically be required on the bond side.
We are seeing some differences in quality on the use-of-proceeds loan side, however. It's a smaller sample size, but the degree of quality of standalone green, social or sustainability use-of-proceeds loans is noticeably higher. Around 85% of these are getting an SQS1 or SQS2 score, which isn't far off from that overall nearly 90% number for use-of-proceeds instruments. Given the smaller sample sizes, and that we're not looking at the entire market, we can't draw very firm conclusions about it. But there is more of a delta on the sustainability-linked side.
EF: What is Moody's Ratings' view on the new transition label the Loan Market Association (LMA) is working on, and the associated planned Transition Loan Principles?
Swami Venkataraman: Essentially, the Transition Loan Principles are intended to apply to financings that may not meet the standard of the Green Loan Principles, but nonetheless reduce carbon emissions and help move an entity towards a lower emissions profile.
Their development reflects a couple of things. First, it reflects the fact that the sustainability-linked market hasn't supported the scale-up of transition financing as much as originally conceived: sustainability-linked financing doesn't set any restrictions on the use of proceeds, as long as the issuer meets certain benchmarks, so a transition label wouldn't be necessary. Transition Loan Principles are about adding another tool to the toolbox to help scale-up transition financing.
The other aspect is that it reflects a desire on the part of banks, especially European banks, who are facing a lot of regulatory attention on how much they are helping the transition of the broader economy. Green loans are an important part of this, but the greatest challenge lies in transitioning the rest of the brown economy, and banks don't have a clear way to demonstrate that they are helping companies reduce emissions outside of the green loan portfolio. Provided the transition label is credible, and not subject to greenwashing, it would help banks make the case with regulators that they're financing the transition.
EF: In what ways can Moody's Ratings assessments help advance the transition loan market?
SV: As an SPO provider, we have the ability to assess alignment against transition principles as well, and thus play the same role in providing analytics and transparency towards the use of the transition label.
But there is another concrete example I could give. Recently, a consortium of environmental groups, including the Environmental Defense Fund, Columbia-SIPA, the Climate Bonds Initiative, and a number of investors and banks, developed and published guidance for including methane abatement in oil and gas debt structuring. We provided some analytical feedback to their draft proposals.
The consortium took the position that reducing methane emissions is critical to keeping a 1.5 degrees outcome possible. This guidance will allow banks and bond investors to lend to projects that credibly reduce methane emissions from oil and gas companies without necessarily requiring those companies to set targets for Scope 3 emissions, or to reduce their oil and gas output – which otherwise they might need to do to qualify for green lending.
This is essentially a 'transition principle' of sorts. It is specific to one use case in one sector, and it has a lot of safeguards to make sure that investments don't result in incremental oil and gas development or extend the life of a field that would have otherwise closed down. Similar to the transition principles, we can also provide alignment opinions against the methane guidance, should issuers look to borrow against them.
ACF: Also relevant to the transition market is our ability to assess the credibility and strength of borrowers' transition strategies using our Net Zero Assessment Framework. Our assessment evaluates the ambition of emissions reduction targets by benchmarking them against global and sectoral pathways, examines the credibility of the implementation capacity of these strategies in terms of their action plans and planned capital expenditures, and assesses the robustness of governance structures to ensure target achievement.
EF: How are traditional banking regulations shaping sustainability-focused lending across regions?
MK: One of the examples that we've seen is in Europe, where the European Banking Authority (EBA) aims to support certain infrastructure loans via a reduction in capital requirement against those loans, what is typically termed an infrastructure supporting factor. Beginning this year, the EBA has included an additional provision in this regulation whereby projects should be evaluated to see whether they contribute positively to one or more of the environmental objectives set out in the EU Taxonomy and ensure they do not significantly harm the other environmental objectives.
We've had conversations with banks who are looking into this as essentially a sustainability element combined with an infrastructure investment incentive to encourage them to channel loans towards projects that are meeting sustainability criteria.
These may or may not ultimately be labelled loans in the sense that we were talking about before. But even if they're not, it's an example of how banking regulations are directing capital to support these types of sustainable investments.
EF: What are your expectations for the labelled loans market for the rest of 2025 and 2026?
JSL: Given the private nature of much of the labelled loan market, predicting volumes with any degree of precision is challenging. At a high level, however, we anticipate that volumes will remain somewhat suppressed this year, as borrowers navigate a more complex macroeconomic and policy environment. Over time, however, we anticipate volumes will rebound given the global scale of financing needed to support sustainable development and the transition to a low-carbon economy. There are also regional nuances which will continue to support markets around the globe.
In the Asia-Pacific region, for example, there is continued top-down policy support, including efforts to define transition activities and credible transition planning, which will allow borrowers from hard-to-abate sectors to access labelled debt instruments. We also expect green loans will recover strongly as China leads the global clean energy manufacturing supply chain and continues to set a scorching pace in the installation of renewables and in electrification of the economy.
Adriana Cruz Felix is head of sustainable finance assessments, EMEA, based in Paris, Matthew Kuchtyak is head of sustainable finance assessments, Americas, based in New York, Jeffrey Lee is head of sustainable finance assessments, APAC, and Swami Venkataraman is global head of sustainable finance assessments, also in New York, for Moody's Ratings.
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