The environmentally sensitive shoots developing in the global bonds market appear to be heading for a serious growth spurt with another record quarter of "green bonds" issuance.

In a research note on the sector, the credit ratings agency Moody's found environmentally focused green bond issuance in the June quarter hit a record $US20.3 billion ($27 billion), well above the $US16.9 billion ($22.5 billion) recorded in the first quarter of the year.

Added together, the two quarters raised almost 90 per cent more capital than in the first half of 2015.

"The global green bond market is now poised to reach $US75 billion ($100 billion) in total volume for 2016 and so set a new record for the fifth consecutive year, given the strong issuance already observable in the first two weeks of Q3," Moody's senior vice president Henry Shilling said.

That fresh flow in the third quarter includes $300 million worth of bonds from Victoria put out to tender earlier this month, the first green issuance from an Australian state or federal government.

"At the time of our first quarter report, we had thought that the market could potentially reach $US70 billion ($93 billion), well above last year's record of $US42.4 billion ($56 billion)," Mr Shilling said.

The green bond market operates in the same way as traditional bonds, except they raise funds specifically for environmentally centred, but not necessarily climate-focused, projects.

Clean energy projects dominate the market

The increasing demand has been supported by many big pension funds now carrying mandates that stipulate portfolios must hold required levels of environmentally friendly investments.

Around two-thirds of green bond proceeds in the quarter were directed to renewable energy and energy efficient projects, with clean transport accounting for a further 17 per cent of the money raised.

The US dominated issuance, with 23 per cent of the market, followed by the big development agencies such as the World Bank, with 17 per cent, although China is expected to bounce back to its dominant position in the market with $US3 billion worth of bonds in the pipeline for sale in coming months.

The financing activities on offer ranged from the corporate sector, with $1.6 billion worth of bonds from Toyota for a cleaner range of vehicles, to municipal bonds from the likes of Paris and Gothenburg, down to much smaller developmental bonds for specific clean water and sustainability projects in sub-Saharan Africa and India.

Australia accounted for 2 per cent of the market, thanks to a $300 million issue from Westpac to develop new and refinance existing renewable energy generation.

Returns in-line with traditional bond market

Moody's found 97 per cent of the green bonds were investment grade, with 43 per cent carrying the top tier AAA rating and only one - from Banco Nacional de Costa Rica in deal to finance renewable energy and clean water projects - was deemed to be in the "speculative" Ba1 rated category.

Overall returns were solid, although slightly below global benchmarks.

The Bank of America Merrill Lynch Global Bond Index returned a total 2.5 per cent for the quarter, matching the S&P 500 Index, and a hefty gain of 5.7 per cent for the first half of the year as bond yields fell and prices soared.

Moody's found green bonds lagged slightly with gains of 1.7 per cent for the quarter and 4.3 per cent for the first half of the year.

However, Moody's noted that, given the similar credit profile of green and traditional bonds, the difference in total return was most likely due to the fact that green bonds have a shorter weighted life on average and longer-dated bonds had delivered much higher returns overall.

Green funding shortfall still massive

While there remains a degree of "it is a green bond, if I say it is a green bond" in the market, the rigour of assessment appears to be improving, with 59 per cent of transactions gaining at least one external review or third-party certification.

Standards were far higher in Europe, where 72 per cent of transactions were externally reviewed, compared to just 24 per cent in the US.

Last month the International Capital Markets' Association updated the guidelines to its Green Bond Principals, although their adoption remains voluntary rather than mandatory.

While green bond issuance is growing rapidly, it still falls well short of the so-called "2 degree Celsius principles" pushed by the likes of the United Nations Climate Summit and World Economic Forum.

In a 2013 report, the World Economic Forum estimated an additional $US700 billion per year ($930 billion) was needed to be spent on clean energy infrastructure, sustainable transport, energy efficiency and forestry to meet the climate challenge.

In a separate report, investment bank HSBC found hidden financing in existing development assistance programs around the world, which could be described as "2 degree Celsius financing" added up to around $US400 billion ($533 billion), leaving a funding gap of around $US300 billion ($400 billion) annually.