The demand for green bonds is not just taking root, it is blossoming, says Mamadou-Abou Sarr, head of ESG, or environmental, social and governance investing, at Northern Trust Asset Management (NTRS - Get Report) .
"Green bonds were a mostly quasi-government opportunity in the past few years set up to meet demand from dedicated ESG-focused investors, but this is no longer the case," says Sarr. "Amid increased appetite for responsible investment opportunities, the range of issuers has widened considerably, with banks, corporates and municipals raising capital to fund environmentally focused projects."
Green bonds were originally created to fund projects with positive environmental or climate benefits. The majority of the green bonds issued are green " use of proceeds" or asset-linked bonds. Proceeds from these bonds are earmarked for green projects but are backed by the issuer's entire balance sheet. Apple (AAPL - Get Report) , for example, issued a $1.5 billion green bond in February.
In recent years, the issuer base for investment grade green bonds has become increasingly diverse, with corporates bringing almost half the deals in 2015 and so far in 2016, according to Sarr. Following the successful agreement of the COP21 summit in Paris, Sarr expects countries around the world will be encouraged to adopt climate-supportive frameworks.
"We believe that this could propel businesses to ramp up their activity in sustainability projects, thus providing a necessary boost to issuance, especially in a time of suppressed global interest rates," says Sarr.
Still, investing in this asset class is not without its challenges. With a variety of independent green bond assessors, there is no easy platform for investors to understand the differences in green bond offerings. Market depth is also a significant hurdle, according to Sarr.
"With the total amount of green bonds outstanding currently below $100 billion, the market is simply too small to satisfy demand from the growing number of responsible investors," says Sarr. "This impacts both accessibility and liquidity, which are becoming important considerations for fixed income investors."