Moody’s has highlighted a growth spurt in green covered bonds as a bright spot in a year in which overall green bond supply is falling short of expectations, saying growth in the secured instrument could outpace the broader market after a notable expansion into residential mortgage-backed issuance.

In a report on Wednesday, Moody’s said that green bond issuance – based on Climate Bonds Initiative figures and classification – rebounded in the second quarter of 2018 to $44.9bn (EUR38.6bn), the second highest issuance in the decade-long history of the market.

After sovereign issuers were more prominent in the first quarter, Moody’s noted that global corporates accounted for more than half of green bond issuance in the second quarter. Financial corporates played a much more significant role, with their share of issuance increasing from 10% in the first quarter to 37% in the second.

However, after issuance in the first quarter was relatively low, at $31.9bn, the rating agency said the pace of supply remains well below initial expectations. It has therefore lowered its full year green bond issuance forecast from $250bn to $175bn-$200bn.

“While we expect a more active second half of the year, this is unlikely to fully offset the growth moderation seen during the first six months of 2018,” said Matt Kuchtyak, an analyst at Moody’s.

The rating agency attributed the slower growth to rising interest rates, which it said has weighed on debt issuance globally, and issuers’ increasing focus on social, sustainability and other labeled bonds, “infringing on green bond issuance at the margins”.

Moody’s struck a more positive note on the green covered bond market after five benchmark green covered bonds were issued in the first half of 2018, compared with two in the whole of 2017.

“We expect the market for green covered bonds to continue growing in line with the broader green bond market, and perhaps even at a faster pace,” said the rating agency.

It added that as the European Central Bank is now gradually reducing its purchases of covered bonds, there is greater potential for a broadening of covered bonds’ investor base to include investors with green and sustainable mandates. Debutant green covered bond issuers have recently cited a desire to expand their investor base to mitigate the ECB’s withdrawal as being among the attractions of the green product.

“From an issuer’s perspective, green covered bonds can be issued off an existing covered bond platform, reducing the operational and administrative burden and potentially making investment in green bond credentials more cost efficient,” added Moody’s.

Significantly, this year’s deals have included the first to be backed by residential mortgage loans – namely inaugural issues from SpareBank 1 Boligkreditt and DNB Boligkreditt – Moody’s said, noting that the collateral is by far the most commonly used for covered bonds.

“The SpareBank 1 deal contained two features we expect to be widely replicated in the future,” said Moody’s. “The first was that the bank stated its intention to maintain a sub-pool of cover pool assets meeting eligibility criteria for energy efficiency, up to an amount at least equal to the outstanding green covered bonds. This feature explicitly links the green covered bonds to the use of the proceeds from these bonds to fund green assets.

“The second feature was the use of building codes and an intent to use energy performance certificates, when available, as the markers for green mortgages. This approach has the advantage of being relatively simple and transparent.”