Moody's Ratings' analysts explore the evolving nature of transition finance, the role digital infrastructure could play in labelled bond markets, and what will unlock opportunities in sustainable bond issuance
Environmental Finance: What is your forecast for the sustainable bond market in 2026?
Matthew Kuchtyak: We expect around $900 billion in global labelled sustainable bond issuance in 2026, broadly flat compared with 2025. This includes use-of-proceeds green, social, sustainability and transition bonds, as well as sustainability-linked bonds (SLBs).
Issuance has hovered near the $1 trillion mark for several years. While political headwinds and competing issuer priorities exist – including energy security concerns, defence spending needs and geopolitical tensions – the global adaptation and mitigation investment gap remains substantial and continues to support continued issuance.
Green bonds will remain dominant at roughly 60% of total issuance, or about $530 billion. Renewable energy, energy efficiency, clean transport and green buildings will continue to be the most financed categories, with gradual diversification into transition activities, adaptation and digital infrastructure.
Social bonds are projected to be around $115 billion. The segment remains structurally smaller due to fewer benchmark-sized opportunities and limited private-sector issuance. Many social projects are instead financed through sustainability bonds.
We expect sustainability bonds to reach approximately $190 billion. Nearly 40% of our recent use-of-proceeds second-party opinions (SPOs) have been sustainability frameworks, reflecting issuer preference for use of proceeds flexibility and benchmark-sized transactions that combine green and social use of proceeds.
Transition bonds will reach around $40 billion, nearly doubling prior peaks, while sustainability-linked bonds are likely to remain the smallest segment, with no significant rebound expected in 2026.
EF: Turning to transition bonds, how do you expect that segment to evolve this year?
Swami Venkataraman: Transition finance is not a new concept, but it is entering a new phase.
Moody's Ratings deems $5.2 trillion of rated debt outstanding today as associated with elevated credit risk from transition exposure. At the same time, annual investment in the energy transition exceeds $2 trillion. When contrasted with the global labelled bond market – still below $1 trillion annually and only a share of this financing transition – the mismatch is clear.
Hard-to-abate sectors have historically struggled to access labelled markets, due to concerns about greenwashing or reputational risk. As a result, the sectors requiring the most capital for transition have had limited access to labelled finance. The introduction of the Transition Loan Principles – jointly published by the Loan Market Association (LMA), Asia Pacific Loan Market Association (APLMA), and Loan Syndications & Trading Association (LSTA) – and the International Capital Market Association's (ICMA) Climate Transition Bond (CTB) Guidelines in late 2025 was therefore significant as it enables transition financing under a use-of-proceeds structure, establishing a transition label and structured safeguards.
As a result, we expect 2026 to mark the beginning of steady expansion in explicitly labelled transition issuance, particularly in hard-to-abate sectors. The label is also attractive to banks who are looking to demonstrate to regulators exactly how they are supporting the greening of the broader economy.
EF: You recently provided the first transition SPO aligned with the new guidelines for First Rand Bank. What made that transaction notable?
Adriana Cruz Felix: The South African financial institution First Rand Bank was among the first to release a framework explicitly aligned with the ICMA and LMA/APLMA/LSTA transition guidelines. The framework featured tangible criteria on how this kind of financing can be applied.
First Rand addressed the different safeguards that are being recommended by the guidelines. At the entity level, it clearly articulated due diligence processes to assess its borrowers' transition strategies, including alignment with climate pathways and the other five project-level safeguards such as greenhouse gas reduction, management and disclosure of carbon lock-in, and confirmation that no feasible lower-carbon alternatives are available.
At the project level – spanning aviation, mining, cement, gas to power, and other sectors – safeguards were translated into specific criteria or measurable thresholds. The conversion of open-cycle gas turbines to combined-cycle gas turbines financing, for example, was restricted to jurisdictions where renewable penetration remains below 25%, recognising gas as a transitional fuel in that context. A minimum 20% emissions reduction was required, and a defined sunset date of 2035 addressed carbon lock-in risk.
The framework underscored that transition finance must be contextual. What qualifies as credible in South Africa may differ from Europe. Regional specificity is critical.
Alongside our SPO, we published an explanatory comment detailing our approach to assessing transition-labelled debt. We gave specific examples on how each safeguard within the transition guidelines is translated into concrete analytical criteria in the framework – particularly around disclosure and transparency.
We also cited prior transactions in mining, aviation and cement where we had issued opinions aligned with the Green Bond Principles, but which reflected specific transition characteristics. This provided additional granularity to the market on how transition analysis works in practice.
We expect the guidelines to promote growth in the segment. However, this is likely to be steady rather than exponential, with around $40 billion of issuance, nearly double the record
$21 billion in 2024, and a gradual diversification beyond the historical market concentration in Japan. We see increasing potential across Asia-Pacific, emerging markets and parts of Europe as investors are increasingly calling for transition-labelled finance to support credible decarbonisation strategies in hard-to-abate sectors and address the $2.4 trillion annual climate mitigation gap by 2030. The trajectory is one of gradual diversification and deepening credibility.
EF: What would unlock faster growth in transition-labelled finance?
SV: Two developments would be particularly impactful. First, more granular regional sector pathways. Sector pathways are helpful, but they must also reflect local realities. We are seeing demand – particularly in Asia – for such region-specific guidance. As such, we have developed differentiated regional pathways for advanced economies and emerging markets across utilities, steel, cement, aviation, shipping and other hard-to-abate sectors in order to better capture different regional development trajectories.
Second, greater investor clarity would help. Transition bonds do not always qualify as green bonds, and investors are still determining where they sit within portfolio mandates. Impact funds have been mentioned as a possibility, albeit relatively limited in size. The eligibility of such instruments for Article 7 funds as part of the EU Sustainable Finance Disclosure Regulation (SFDR) 2.0 could significantly support the growth of the transition label. We note that both SFDR 2.0 and the transition-label safeguards focus on the presence of credible entity-level transition plans.
MK: A further variable, which will differ by region, is the underlying economics of the transition technologies themselves. The viability of assets such as low-carbon hydrogen, carbon capture, utilisation and storage (CCUS), and alternative low-carbon fuels remains heavily influenced by policy support and subsidy frameworks. In the US, for example, policy shifts in recent years have altered the support available to some of these technologies. As policy frameworks evolve, the project pipeline will likely evolve with them.
EF: Could the emergence of transition bonds further weaken the SLB market?
MK: It could be a factor. SLBs initially gained traction among non-financial corporates, particularly in carbon-intensive sectors, as a way to finance transition strategies without project-specific use of proceeds. However, the challenges facing SLBs predate the emergence of transition bonds. Early criticism around unambitious targets and insufficient financial penalties damaged credibility and deterred issuers.
ACF: Investor uncertainty around how to classify SLBs within investment portfolios has also played a role. There was never a particularly strong or unified signal from investors calling for a major expansion of the SLB segment.
The transition guidelines mention them, however. For entities that don't have enough use-of-proceeds projects, the idea is that sustainability-linked instruments could be utilised.
EF: Beyond transition, which themes stand out in 2026?
ACF: Adaptation, resilience, nature and biodiversity finance remain underdeveloped but increasingly urgent. Despite ongoing challenges regarding bankability, there is a growing emphasis on addressing risks from severe weather.
Moody's analysis highlights the significant economic impact of physical climate risks, potentially leading to a global economic loss of 17% of GDP by 2050 if current policies persist. In 2025 alone, natural catastrophes resulted in $135 billion in losses.
Public-sector issuers are expected to lead in adaptation projects, exemplified by Tokyo's issuance of the first resilience bond under the Climate Bonds Standard. This trend is mirrored in nature-related financing, with frameworks including marine- and coastal-related projects like China’s green and blue finance framework and the Netherlands’ including nature-based solutions in the Dutch Delta Program to combat flood risk exposure.
Together, adaptation and nature-related projects accounted for 22% of green and sustainability bond categories in 2025, up from 16% in 2020. Blue bonds – focused on water and ocean-related projects – continue to grow as issuers reference related ICMA and International Finance Corporation (IFC) guidelines.
The catastrophe bond market is also set to grow, driven by strong demand for risk transfer and attractive risk-adjusted returns.
Digital infrastructure growth, especially in data centres, is driving opportunities in sustainable debt. The International Energy Agency forecasts a rise in data-centre electricity consumption to 600 TWh by 2026. Energy and water efficiency are key to meeting investor scrutiny over their sustainability credentials.
Digital infrastructure companies have established green finance frameworks. Financial institutions and sovereigns are also engaging in this space. Financing approaches are also diversifying, with increased activity in labelled project finance and structured finance.
Additionally, digital credit markets are advancing sustainable bonds, as seen with Hong Kong's digital green bond integrating disclosures with a digital assets platform.
EF: How could data centres intersect with sustainable finance?
SV: We expect roughly $3 trillion in data-centre capital expenditure between 2026 and 2030. Developers are exploring green and sustainability-labelled instruments as part of diversified capital strategies – and we have produced several SPOs in this space already.
At the same time, data centres face scrutiny over energy consumption, water usage and community impacts. Operators are adopting more water-efficient cooling technologies, renewable power sourcing and mitigation strategies to address grid constraints and pricing pressures. As standards evolve, digital infrastructure assets may increasingly qualify for labelled financing, particularly in water-constrained regions.
MK: Labelled bonds from companies focused on digital infrastructure will grow in 2026 as the global data centre build-out advances and operators respond to stakeholder scrutiny of sustainability considerations. We have already provided SPOs to several large companies which have published sustainable bond frameworks in recent years. These include Equinix and Switch in the US, Digital Edge (Singapore) in Asia, and Bulk Infrastructure Group in Europe. While corporate issuers will make up a large share of activity in this space, other sectors – including financial institutions and sovereigns – will increasingly feature data-centre projects.
EF: Finally, how is the SPO market evolving in line with wider market conditions?
SV: Aside from the emergence of transition finance, a major area of evolution for our analysis is the rise of local taxonomies and thematic standards. We have developed 18 supplementary opinions that we provide in addition to industry guidance alignment, that reflect more niche, thematic labels – such as blue finance, forestry, EU Taxonomy, sukuk or Methane Finance Guidelines – as well as tracking regional guidelines, such as those of Japan, Singapore, Hong Kong, Australia, Mexico, etc.
Another key evolution is the growing demand for post-issuance reviews. Investors increasingly want assurance that issuers are delivering on commitments, not just making them. This reflects a broader shift from intent to accountability.
ACF: Finally, emerging markets will remain a critical focus. In many regions, the definition of what constitutes a "green" or "transition" project is still evolving. Our role increasingly involves contextualising projects – recognising, for example, why diesel public transport might deliver meaningful sustainability benefits in certain African markets, even though it would not qualify in Europe.
This represents diversification rather than fragmentation, provided comparability is maintained. For example, our Sustainability Quality Score (SQS) ensures comparability – an SQS1 in France is equivalent to an SQS1 in Senegal – and highlights the added-value we can provide investors that are navigating an increasingly diverse market.
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, and Swami Venkataraman is global head of sustainable finance assessments, also in New York, for Moody's Ratings.
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