Moody's Investor Service (Moody's) has cut its green bond forecast to between US$175-US$200 for 2018. Initially predicted to be US$250 billion in size worldwide, Moody's cites modest growth during the first half of 2018.

According to the agency, there was only a 7% increase in proceeds in the first six months of 2018, compared to first half 2017, with issuers around the world raising around US$76.7 billion from green bonds. Juxtapose this modest upturn to an 85% growth rate experienced from the full years of 2016-2017 and the figures raises cause for concern for environmentally aware financial investors.

However, the slowdown highlights the need for the green bond market to evolve. Indeed, the idea of green covered bonds has undoubtedly taken off, with European issuers leading the way in that asset class. So far in 2018 there have been five green covered bonds compared to just two last year. Norwegian Sparebank 1 Boligkreditt kicked off the trend early this year when it tapped the capital markets with a EUR1 billion green covered bond aimed at funding a pool of mortgage loans backed by energy efficient housing.

Luxembourg, in an effort to encourage more issuances, established a framework governing covered green bonds from the country to clarify which type of assets can be considered green. Covered bonds in general have been an attractive funding channel for the banks that typically issue these bonds. They involve highly-regulated securities with high credit ratings. This tends to mean lower funding costs than unsecured debt.

As a result, according to a report from the Climate Bonds Initiative, green covered bonds have the potential to help both banks and institutional investors.

"Banks will be able to access cheaper and longer-dated funds to on-lend to designated low carbon projects. At the same time, highly regulated institutional investors will be able to increase the exposure of their portfolios to low carbon assets because of the high level of security offered by covered bonds," states the report.

In Asia the development of green covered bonds development lags behind European counterparts, with only Bank of China issuing the region's sole green covered bond back in 2016. In fact, covered bond financial regulations are still being developed in the region, with only the likes of Australia, Singapore and South Korea having some standards on issuances.

Green sovereign bonds are expected the play a greater role in the overall green bond market. Following France's landmark EUR7 billion green bond in 2017, small but growing numbers of countries have gone down the green bond path, including Belgium, Fiji, Indonesia, Lithuania, Nigeria and Poland. Indonesia's green bond is unique as it is structured as an Islamic bond (sukuk), allowing Islamic investors a chance to participate in the deal.

According to Moody's, potential sovereign issuers need to overcome several challenges, such as the ability to provide investors with "granular impact reporting and effective proceeds management." The horizon looks bright for sovereign green bonds, with governments such as Italy, Kenya and Hong Kong contemplating future deals.

In the case of Hong Kong, its administration is planning a HK$100 billion (US$12.74 billion) green bond programme as a benchmark example to spur additional green bonds in the city.

"Green bonds provide a strong signal of a government's commitment to its climate and environmental policy agenda," says Matt Kuchtyak an analyst at Moody's. "Green bonds are key to financing a government's commitment to the Paris Agreement."