Green Bonds in Practice: How European Capital Really Gets Allocated

When it comes to green bonds, capital allocation isn’t just about compliance, it’s also a reflection of sectoral priorities. Different sectors approach sustainability from different angles, and that divergence becomes clear when you look at where the money actually goes.

At SFI, we analyzed nearly 700 European green bonds to examine how issuers across sectors allocate proceeds across ICMA’s Use of Proceeds categories. What emerged was a distinct pattern: a few sectors like Real Estate, Financials, and Utilities dominate green capital flows, and their choices shape the broader profile of the market.

While categories like Renewable Energy and Green Buildings absorb the lion’s share of funding, others, including Pollution Prevention, Biodiversity, and Circular Economy remain underfunded across the board. The result is a market that rewards the familiar, favours measurable outcomes, and quietly sidelines more complex or longer-horizon themes.

This article explores who funds what and why that matters for the evolution of green finance.

Where Does Capital Go?

The analysis behind this article focused on Green bonds and this meant that our analysis was limited to the ICMA Use of Proceeds categories that were reported within these published documents. The vast majority of the proceeds from these bonds- nearly 98% post-issuance, concentrate around four familiar categories: Renewable Energy, Green Buildings, Clean Transportation and Energy Efficiency.

Two of these categories – Renewable Energy & Green Buildings dominate the allocations at roughly 2 times each of their counterparts. In all, these areas accounted for roughly 88% of stated framework allocations, suggesting that issuers had a clear preference for allocation of capital. One could posit that the reason for this might have something to do with a preference for asset types with clearer reporting pathways and tangible KPIs or more flexible project execution.

Fig 1. Where Green Capital Goes

The other side of the chart also poses interesting questions with regards to the motivation (or lack thereof) of issuers towards categories like Climate Change Adaptation and Environmental Sustainable Management of Resources. A paltry 1.1% and 0.5% of total allocation was attributed to the two categories respectively.

Which Sectors Drive Capital?

Flipping this around and looking at allocation at a sectoral level yields more interesting clues as to the potential drivers for this behaviour at a macro level. Viewing allocation per issuer across each sector allows for a better sense of % contribution towards green projects via green bond financing. The top 3 are the Real Estate sector, the Financial sector, and the Utilities sector.  Perhaps logical given their need for financing large revenue generating projects with those previously mentioned quantifiable KPIs.

Fig 2: Which Sectors Drive Capital?

What Does Sectoral Participation Look Like?

Putting this together, it seems reasonable that these 3 sectors skew the allocation of capital towards categories like Renewable Energy & Green Buildings, but where else does capital flow? And can we better understand priorities and likelihoods of financing per sector?

• Financial Sector: Our research across these nearly 700 bonds shows that the Financial Industry, unsurprisingly, best plays the role of the equal opportunities financier, albeit with a heavy tilt towards categories that have a proven track record for measurable ‘impact’. Given the inherent agnosticism of the sector combined with the need for hard data, this is clearly a case of a square peg meeting a square hole. What is interesting to note for the sector is the growing, but clear interest in wider topics such as Water, Pollution, Resource management and to a lesser extent Circular Economies.

• Utilities Sector: A similar story is present for the Utilities sector – clear and predictable tilt of allocation towards the category they are most benefitted by – Renewable Energy and to a lesser extent Energy Efficiency, but also financing categories that ‘downstream’ like Clean Transportation. Rather interestingly, we also find significant allocation towards Biodiversity & Pollution Control, suggesting an acknowledgement of the impact the sector has on these issues.

• Real Estate Sector: Aside from Communication Services, issuers in this sector are single-minded in their investment into categories that are relevant to them. This also suggests that there is large scope for issuers in these sectors to invest in other categories that are relevant to them – both upstream and downstream within their value chain.

• Government Sector: Allocation for the Government reflects its uniquely strategic role. This sector’s allocations are broad and span several categories, from Clean Transportation to Climate Change Adaptation to Biodiversity, Renewable Energy and Water Management. Notably, they are one of the few actors contributing significantly to Climate Change Adaptation. This reflects both mandate and mission — governments often step in where private capital hesitates, especially when ROI is indirect or long-term.

• Industrial Sector: The Industrials sector reveals a more selective pattern. While Clean Transportation and Renewable Energy appear as expected destinations, the sector also channels smaller sums into Energy Efficiency, Waste Management and Pollution Control. These choices align closely with value chain emissions and operational externalities. Interestingly, despite its central role in material cycles, the sector has a minimal presence in categories one would assume would have an immediate positive impact such as Circular Economy, Climate Adaptation and Resource Management. A mismatch that may speak to reporting challenges or a lack of scalable project pipelines in these areas.

• Communication Services: Here, the trend is almost the opposite. This sector shows a sparse allocation footprint, with only minor commitments in Energy Efficiency. The lack of diversity in participation could reflect a narrower set of eligible projects or limited integration of sustainability into the core investment thesis. It also points to an opportunity — for data infrastructure, digital sustainability tools, or low-emission communications — to be better aligned with green finance mechanisms.

Fig 3: Who Funds What?

Connecting the Dots: Allocation, Sector Strategy, and Market Gaps

The insight here is not just about who funds what, but why they do so. The dominant narrative across the top three sectors – Real Estate, Financials, and Utilities, is one of alignment with business models that both enable scalable financing and reduce reputational or execution risk. Categories like Green Buildings or Renewable Energy are tangible, economically productive, and, crucially, reportable. But this also reveals the scope for expansion in current green finance strategies.

Several Use of Proceeds categories that directly address systemic issues from Biodiversity to Circular Economy, to Management of Resources to Pollution Control remain structurally underfunded. While others that would seem apparent from a risk mitigation perspective, such as Climate Adaptation, strikingly remain out of scope for many issuers across almost every sector in Europe. The most reasonable assumption to be made from these findings is that wider allocation towards other categories is slow not because they aren’t critical, but rather because they arguably often come with intangible benefits, longer time horizons, or require more complex measurement frameworks. In some cases, like Pollution Prevention or Sustainable Water Management, the problem isn’t absence of relevance – it’s absence of accounting tools that satisfy investors’ growing need for data-verifiability.

What This Means Going Forward

If green bonds are to drive real systemic change, there is an urgent need for three shifts.

1. First: An evolution in measurement, where complex impact categories are better modeled, priced, and communicated.

2. Second: Stronger incentives or regulatory nudges that expand the definition of ‘bankable’ beyond carbon and energy metrics.

3. Third: Platforms that make allocation data accessible, comparable, and contextual – not just at issuance, but across the lifecycle of the bond.

At SFI, we are building toward this last point. Our platform tracks pre- and post-issuance alignment, maps category allocations to issuer types and SDGs, and highlights systemic allocation gaps.

We’ll continue this series by diving deeper into the disconnect between stated SDG alignments and post-issuance behavior with a focus on what gets funded, what gets dropped, and what that reveals about sustainable investment priorities or blind spots in today’s European market.