Exploring Investor Incentives for Public Sector GSSS Bonds: Insights from the OECD

What prompted this research, and why was it important to examine investor incentives for public sector GSSS bonds at this stage in the market’s development?

Paul Horrocks: Green, social, sustainability and sustainability-linked (GSSS) bonds link scale, sustainable impact and long-term duration. This makes them powerful instruments to drive financing, especially from the private sector, towards sustainable development. Yet in 2025, only 17% of the overall green, social and sustainability bond market was issued in developing countries – dropping to 5% when not including the People’s Republic of China.

On the one hand, this means that we need to see more GSSS bond issuances coming from developing countries. Yet this is only one half of the picture: we also need greater investor demand towards these regions and instruments. This is precisely what this study aimed to answer: how do investors view public sector GSSS bonds? And what do investors need – from donors, issuers and other market players – to help increase the attractiveness of these instruments? If we want to support the consolidation of the GSSS bond market in developing countries, now is the right time to be asking these questions. Public actors, including MDB and DFIs, are shaping the criteria for sustainability – yet the private sector is the main source of finance, including the large and deep bond markets. Aligning these actors was a key consideration for developing the survey.

To do so, we conducted a survey on investors – and complemented this with a qualitative element which built on the candid and transparent conversations we had with investors. The research therefore built strongly on the expertise and network of both the Luxembourg Stock Exchange and the OECD Community of Practice on Private Finance for Sustainable Development, as well as the long-standing collaboration between our two organisations.

One of the study’s key findings is that investors are motivated not only by sustainability objectives, but also by long-term risk and return considerations. What does this suggest about how to continue strengthening the GSSS bond market?

Paul Horrocks: Surveyed investors stressed the fact that their decision to invest in public sector GSSS bonds compared to conventional bonds will ultimately be driven by the investment strategy of a particular portfolio. This also has an important policy implication: to increase investment in GSSS bonds, it is critical to ensure that they fall within the parameters of investors' long-term risk and return considerations. Without this, investors are unlikely to participate – so these are the first elements that are needed in the design of the bond prior to issuance.

Emma Raiteri: Use-of-proceeds GSS bonds make up the vast majority of the GSSS bond market, so it's interesting to look at the dynamics here. Our study found that investors overwhelmingly support sovereign issuances of use-of-proceeds bonds over conventional bonds. This is encouraging for issuers considering to (re-)enter the sustainable bond space.

Our survey also found that financial returns continue to be important factors driving investment decisions for GSS bonds. Many investors actually tend to prioritise this over impact and sustainability outcomes. In supporting the issuance and structuring of GSS bonds, it is therefore important to keep this in mind.

The study suggests that investors do not necessarily see GSS bonds and SLBs as competing instruments. How do you see the two instruments complementing each other, and in what situations might one be more appropriate than the other?

Emma Raiteri: I like to think of a toolbox of financing instruments: GSS bonds and SLBs are two instruments within this. This means that their use must be chosen based on the needs and context of the issuer and tailored accordingly.

We know that GSS bonds and SLBs have distinct advantages for issuers themselves. However, I want to focus on the factors that can make the two instruments attractive to investors. The good news is that our survey found that investors tend to view both GSS bonds and SLBs with similar interest and preference.

GSS bonds are tied to underlying assets, so they very transparently show what they're financing. Given that investors' allocations are largely driven by institutional investment strategies, the tangible nature of the projects financed can help establish a clear and direct link back to these.

On the other hand, SLBs can be especially relevant for issuers who may not have a pipeline of bankable assets, or who have strong financing needs in areas like biodiversity or climate change adaptation. Investors therefore recognise that they hold particular advantages for sovereign issuers: for example, even in case of government changes, SLBs can allow for continuity and accountability towards meeting sustainability targets.

What are the main obstacles which can influence investor appetite for public sector GSSS bonds?

Paul Horrocks: The strong investor interest that we see relating to public sector GSSS bonds can be impacted by a number of factors in practice. For example, when it comes to institutional risk, investors view political instability or uncertainty and weak governance/institutions as the major risk factors. From a macroeconomic perspective, physical risks and creditworthiness-related factors are considered key determinants of a country's ability to repay its debt. In many jurisdictions, we're seeing GSSS bonds issued by private entities; this can allow investors to claim exposure to a particular region, yet we also need to see sovereigns and sub-sovereigns be active issuers in the market.

Emma Raiteri: I want to nuance this with two further points. First, investors stress the fact that the macroeconomic and institutional risks affecting a given issuer will be the same regardless of the bond type (conventional, GSS or SLB). This underscores how investment decisions are made primarily at the issuer level, rather than at the level of specific instruments. Second, investors expect the dynamics in both the GSS bond and SLB market to improve.

Looking ahead, what would meaningful progress look like for this market over the next few years? And if you had to identify one priority for policymakers, issuers or investors to help achieve that, what would it be?

Paul Horrocks: The GSSS bond market has been in constant evolution since its birth – with recent years demonstrating its resilience and robustness. Looking ahead, truly meaningful progress would mean a market that grows in volumes, is less concentrated (in terms of regions and issuers), and where GSSS bonds make up a larger share of issuers' debt stock and track multi-year trajectory to ensure a committed strategy. In our engagement with investors, we asked them to identify specific instruments or policies that can be used to increase the attractiveness of GSSS bonds.

When it comes to donor support, one area that stands out is the important role of technical assistance (TA) – across both the pre- and post-issuance process. This includes helping issuers put in place budgetary reporting standards for the identification of eligible expenditures or assisting them in producing high-quality post-issuance reports. More broadly, it can also include supporting the development of harmonised and interoperable locally-adapted standards, principles and taxonomies. The provision of TA is powerful due to its versatility: donors can step-in in different ways, based on their respective areas of expertise.

Emma Raiteri: Another concrete way to maximise investor interest is the inclusion of developing country GSSS bond issuances in benchmark indices. Many investors follow passive investment strategies or are constrained in their ability to take off-benchmark risk – yet developing country issuances are often excluded from indices. This can be due to several reasons: the bonds’ small size, to the concentration of benchmark indices on certain markets.

Together, donors and other market players therefore have a strong opportunity to both revisit existing (emerging market and sustainability) indices to make them more inclusive of GSSS bonds from developing countries, and consider the creation of a new index focused specifically on the sustainable development of these countries.

The OECD-LuxSE report on Investor incentives for public sector GSSS bonds can be accessed here.