European banks have significant scope to expand their use of green bonds to finance projects critical to the energy transition, according to new research by the Institute for Energy Economics and Financial Analysis (IEEFA).
The research, which analysed Europe’s 47 largest banks, found that outstanding green bonds account for less than 1% of assets on average, despite most banks having established green bond frameworks.
“Green bond issuance remains too small to materially shift European banks’ asset allocation,” said Kevin Leung, sustainable finance analyst at IEEFA and author of the report. He attributed the limited growth to banks’ continued lending to high-emitting assets and a limited pipeline of green projects.
The research also found that European banks are directing only a minority of green bond proceeds towards activities that directly support decarbonisation, energy security and industrial resilience.
Renewable energy projects account for around 20% of the proceeds allocated through European banks’ green bonds. However, these projects are responsible for about 90% of the reported avoided emissions generated by the green bonds.
In contrast, green buildings receive approximately 70% of allocated proceeds but contribute only 3% of reported avoided emissions, according to the report.
“This composition of allocations does not squarely address Europe’s clean transition and resilience needs,” Leung said. He called for more credible green bond programmes to align funding with a broader range of transition-critical assets with low climate risk exposure.
IEEFA noted that banks already represent a significant segment of the green bond market, but substantial growth potential remains. Many banks hold eligible assets that have not yet been allocated to green bonds, while green bonds account for only a small portion of their market-based funding.
The report recommends that banks more closely integrate green funding with their sustainable finance targets, transition plans and risk management strategies. Such an approach, it said, could strengthen the role of green bonds in directing capital towards Europe’s energy transition and resilience priorities.
“Unlocking the full value of bank green bonds is particularly important given banks’ role in financing the real economy,” Leung said.
He added that European banks have an opportunity to move beyond treating green bonds as a mature market practice and instead use them as a strategic financing tool for projects supporting Europe’s climate and energy security objectives.
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