Flexibility is key to unlocking green, social and sustainability bonds' full potential

Why GSS bonds should not be overlooked

The green bond market may have reached maturity, with established issuance patterns and fewer surprises in store – but maturity does not mean a less attractive market for investors nor that its full investment potential has already been reached. 

One should not ignore the considerable attributes we believe the GSS bond universe has to offer, as well as alternative investment approaches that could more effectively seize opportunities and build greater portfolio resilience. 

Green bonds represent just 60% of the overall GSS market¹. When taken together with social and sustainability bonds, the combined universe stands at close to $4 trillion in market value, exceeding the euro investment grade credit market and offering access to more than 1,100 issuers spread across regions, sectors and currencies². 

The GSS universe has outperformed the global broad market by 3.4% on a cumulative basis since the end of 2022³. This partly reflects the market’s larger proportion of credit and higher sensitivity to European interest rates, which could also resonate with investors looking to diversify away from the US. 

While it can present an attractive terrain to exploit, we believe an unconstrained non-benchmarked approach, with the freedom to invest across segments regardless of their index weighting, can potentially bring out its value. Coupled with flexible and dynamic duration management, it could potentially help mitigate against periods of drawdown and help navigate more volatile market environments. 

This approach, well known in the conventional bond market, surprisingly remains a rarity among GSS bond strategies. Yet it may offer what we see as a unique opportunity for investors to avoid having to choose between the aims of maximising return, limiting drawdowns and delivering positive impact.

Agile duration management is key amid market volatility 

The past few years have seen a historic increase in bond market volatility, predominantly stemming from interest rates. While this can pose a challenge for investors, we believe this could also create potential opportunities to seek returns. 

Having a significant leeway to calibrate duration can be critical in terms of not only aiming to protect the attractive yields the universe provides – limiting downside risk across cycles – while keeping the amplitude to capture the upside when rates rally.

Following an unconstrained approach can also help unlock greater sources of alpha from yield curve positioning. With green bonds issued along the entire maturity spectrum, investors can look to move along the yield curve depending on their views on monetary policy, growth and inflation prospects, as well as issuers’ fiscal profile and supply and demand dynamics. 

In addition, global bond markets can often be closely correlated yet also present idiosyncratic differences, so investors who follow an unconstrained approach have the freedom to potentially take more advantage of cross-market opportunities to enhance returns. 

Using the breadth of an unconstrained allocation 

On a stand-alone basis, the green bond market offers a broad spectrum of segments to invest across – from investment grade and high yield to sovereigns and credit, as well as developed and emerging markets. An unconstrained approach allows investors to seek out the most attractive opportunities wherever they lay. Crucially, it also affords the possibility of significantly investing in underrepresented segments, such as high yield or emerging market debt. 

Emerging markets continue to be an under-allocated segment although their climate and social financing needs are often among the most acute. In the meantime, stepping out of the often-exclusive benchmark focus on investment grade debts could enable investors to capture the carry opportunity of high yield debt.

Enhancing value through social and sustainability bonds

Decarbonisation is often at the forefront of investment strategies, yet social aspects should not be overlooked. Social inclusion is a key part of achieving a climate resilient future, and in many parts of the world social progress remains a key preoccupation.

We believe that social and sustainability bonds can also offer interesting opportunities from an impact and investment perspective. 

Sustainability bonds – debt where the proceeds can be invested in both green and social projects – is a fast-growing dynamic segment of the market that saw record levels of issuance in 2025⁴. They can offer access to a wider variety of sovereign and industrial issuers while being able to support similar themes as social bonds. The format has been particularly appealing to EM issuers as sustainability bonds now represent 36% of total emerging market debt in the GSS bond market⁵.

We believe a blended GSS bond allocation, with a dominant green bond tilt, can offer a potential solution for investors who might not have scope for a dedicated social strategy alongside green bonds, and for whom achieving Net Zero is a stated priority. 

Ultimately, adopting a flexible, unconstrained approach to the GSS bond market has the potential to offer competitive returns, help investors navigate different market conditions and drive meaningful change.