Green and sustainable emerging market debt presents a high‑leverage way to align returns with real‑world impact
Written by Constance de Wavrin, Founder of In|Flow
In systems change, we look for levers, i.e. specific, interconnected points of intervention—policies, practices, resource flows, relationships, power dynamics, and mental models—that, when shifted, transform the conditions otherwise maintaining a problem.
Green and Sustainable Emerging and Frontier Market Fixed Income investments are exactly that to advancing the world’s transition to a resilient, low carbon economy. Emerging markets (EM) account for the bulk of future energy demand and emissions growth, so decarbonisation there largely determines whether global climate goals are met. Emerging market debt (EMD) as an asset class can mobilise large‑scale, predictable capital into the regions of the world that both drive future emissions and are most exposed to climate impacts, while hard‑wiring social inclusion into how that capital is deployed. Well executed, these investments can turn some of the biggest environmental and social challenges ever faced into powerful growth opportunities.
In this article, we explore where investor sentiment stands for Green and Sustainable Emerging and Frontier Market Fixed Income, how investors tend to assess the Risk and Opportunities the segment presents and where an allocation might make sense as part of a broader asset mix.
Where investor sentiment on sustainable EMD stands today
While appetite for green debt is rebuilding, it has become far more discriminating than during the first ESG boom.
Existing investor sentiment for the asset class is shaped by three intersecting forces: tighter global financial conditions, a maturing sustainable bond market, and rising scrutiny of impact and integrity. Sustainable bond issuance has been resilient, holding around the USD 1 trillion mark in 2025, with green bonds remaining the dominant format, while social and sustainability‑linked issuance still lagged amid concerns about credibility and data. Emerging market (EM) sustainable bond issuance has grown in absolute terms, but its share of global volumes has slipped, reflecting higher funding costs, currency risk and capacity constraints on the issuer side.
The “greenium” in EM hard currency debt has largely disappeared as supply has caught up with demand, meaning investors are now being paid closer to conventional spreads for labelled risk. This creates a more selective market: capital is available, but only where structures, disclosure and use‑of‑proceeds credibly support risk and impact.
Risks and return opportunities
From an investor’s lens, the sustainable EM bond opportunity set offers the combination of relatively high nominal yields with structural climate and development needs. While there are material macro, climate and execution risks attached, the asset class remains an attractive, higher yielding diversifier in portfolios.
The old - and new - risks inherent to EM debt
From a pure macro and currency perspective, frontier and lower‑rated EM issuers still face elevated refinancing walls and FX volatility, particularly in hard‑currency sovereign and quasi‑sovereign curves.
In addition, there are climate and physical risks to be aware of, but increasingly priced into corporate and sovereign funding, raising the cost of capital where resilience and transition plans are weak.
Investors may also sense that greenwashing and policy reversals are more prevalent in less developed markets, but this has prompted heightened scrutiny of transition labels and weak sustainability‑linked structures. Still these can trigger unwelcome spread widening and loss of access for weaker issuers. Therefore an important consideration for investors.
Return and impact opportunities in EM and green EM debt
Hard‑currency EM debt currently offers yields around the high single digits, with room for spread tightening if global rates continue to ease and EM fundamentals improve. Meanwhile, local currency EM debt benefits from high real carry and potential FX tailwinds where inflation has peaked and monetary policy is easing. Importantly, within the labelled segment, well‑structured green bonds from stronger EM sovereigns (for example, Chile) have historically priced inside conventional curves, demonstrating scope to earn both incremental impact and competitive total returns.
For investors willing to underwrite more complex structures and engage on use‑of‑proceeds, the mispricing of climate and social risk across EM curves remains a core source of alpha.
Supply‑chain and SME stress testing: implications for issuance
Emerging markets represent important territory to nurture SME growth and sustainability approaches can be instrumental to anchoring investee companies into more solid foundations.
There is emerging evidence from credit and academic papers to a tight linkage between supply‑chain resilience, ESG performance and the cost of debt—central to understanding both SME‑focused impact strategies and sovereign or corporate issuance capacity. Strong ESG performance at the corporate level is associated with lower debt financing costs, with supply‑chain stability (reliable suppliers, diversified customers) acting as a key transmission channel. Climate and environmental risks are beginning to influence leverage and capital structure decisions, with higher climate exposure leading to tighter financing constraints and a greater premium for robust risk management.
SMEs in EMs still face data and capacity gaps in disclosing climate and social performance, which limit their access to sustainable finance despite being central to local employment and supply‑chain depth. This presents both a challenge and an opportunity to foster greater transparency.
From an investor‑sentiment perspective, stress testing SMEs and supply chains does three things:
It sharpens risk pricing for sovereigns whose export bases and tax receipts depend on vulnerable sectors and informal SME ecosystems.
It strengthens the case for targeted use‑of‑proceeds bonds (for example, green or social bonds funding SME energy efficiency, resilience and working‑capital lines through local banks).
It underpins the argument for blended‑finance structures that use first‑loss or guarantees to crowd private investors into higher‑risk segments of the SME and supply‑chain universe.
In practice, investors increasingly ask not just “Is this sovereign aligned with Paris?” but “How resilient are its export‑oriented SMEs and supply chains to climate and policy shocks—and how does that feed back into its debt‑servicing capacity?”
Themes from the global fixed‑income impact lens
Recent impact reporting by large fixed‑income managers provides a useful map of where capital is currently flowing and where gaps remain, across both developed and emerging markets.
Across the four key themes:
Affordable housing: Impact portfolios have financed social and affordable housing in developed markets and select EM urban centres, improving access and quality but often in relatively higher‑income jurisdictions where project scale and credit quality fit institutional mandates.
Community and economic development: Investments span local infrastructure, health and education facilities, and inclusive financial services, including in emerging economies, where bonds securitising microfinance, SME lending or local development banks play a growing role.
Renewable energy and climate change: Green bonds remain the backbone of climate‑aligned fixed income, funding utility‑scale renewables, grid upgrades and clean transport, with EM sovereigns and corporates increasingly active but still under‑represented relative to their mitigation and adaptation needs.
Natural resources: Impact allocations include sustainable forestry, water infrastructure and nature‑based solutions, but labelled bond issuance in EMs is still nascent, with a small number of sustainability and blue bonds pointing to future growth.
These patterns reveal a tension: investor sentiment is positive on the concept of using fixed income to align portfolios with these themes, but actual EM and frontier allocations are constrained by scale, credit ratings, and structuring complexity.
Hard‑ vs. local‑currency green EM valuations
The current valuation picture is central to how sentiment translates into flows.
Hard‑currency EM green and sustainable bonds
Overall EM hard‑currency yields sit near the upper quartile of their historical range, with index yields around the high‑single digits and spreads tighter than recent peaks but still above pre‑pandemic averages.
In EMs, the specific greenium on labelled bonds has largely eroded, estimated to be negligible in 2024 as supply has risen and investors demand more rigorous structures and disclosure.
Issuance growth has slowed more in hard‑currency than in local‑currency format, particularly for lower‑rated and frontier names, as dollar and euro funding remain expensive.
This leaves hard‑currency EM green debt looking fundamentally attractive on carry and potential spread compression, but without a meaningful pricing concession versus conventional bonds—an environment where issuer quality and project selection matter more than labels for return outcomes.
Local‑currency EM green and sustainable bonds
Local‑currency EM debt has benefited from high real yields and a weaker dollar, with several managers highlighting structurally higher expected returns relative to developed‑market fixed income over the medium term.
Green and sustainable local‑currency issuance is rising off a low base, often via domestic development banks and utilities, with strong potential for impact given closer alignment between financing currency and project revenue streams.
Currency risk remains the primary driver of volatility for foreign investors, but local‑currency issuance can lower funding costs and reduce balance‑sheet mismatches for issuers, particularly SMEs and sub‑sovereigns that lack hard‑currency revenue.
From a valuation standpoint, the combination of high local carry, improving policy credibility in several EMs and the gradual expansion of local sustainable bond markets creates a compelling and still relatively untapped segment.
Net Effect Sentiment: Green and sustainable emerging market debt presents a high‑leverage way to align returns with real‑world impact
Investors are well advised to take a differentiated approach to higher‑quality EM vs. more frontier, SME-heavy issuers:
For higher‑quality EM sovereigns and corporates, clearer global standards and growing demand for credible climate and social outcomes are supportive, allowing them to lock in diversified funding and potentially lower all‑in costs over time.
For frontier issuers and SME‑heavy sectors, success will depend on access to technical assistance, blended‑finance de‑risking and the ability to demonstrate robust pipeline and impact data within the new regulatory expectations.
The opportunity to invest in a smaller, higher‑integrity sustainable EM debt universe where capital is scarce for weak structures but increasingly abundant for issuers who can link credible transition and economic development. Either way, emerging and frontier debt markets should only attract investors who think carefully about performance, exits, and risk, and never let their investment model fall short in the countries where they deploy capital.
Green and sustainable emerging market debt is an asset class for investors who focus on building innovation collaboratively and in a way that delivers financial outcomes while also committing to strengthen the ecosystems the underlying investee companies depend on. As long-term investing partners well versed in adaptation and resilience, they understand that it is not just the return on their investment that is at stake but the ecosystems they help build.
