Green bonds are a "lose-lose product" and need to be redesigned to become a mainstream investment product, according to a senior executive at Japan's Government Pension Investment Fund, the world's largest pension fund.

Despite the increasing popularity of the green bond market, Hiro Mizuno, GPIF executive managing director and chief investment officer, told a climate finance conference in Paris that these bonds lack appeal.

Although the green bond market was growing rapidly, and was expected to reach $250 billion in 2018 from virtually nothing in 2012, it accounts for about 1% of the total bond market and is dogged by weak supply, despite high demand.

Mizuno said the green bond market was unlikely to take off because it is more expensive than a traditional vanilla bond, making it costly for the borrower and the lack of supply made it a less liquid investment for investors.

"[The] green bond is still a lose-lose product, we need to redesign it to make it a mainstream investment product," he said.

The financial sector needs to work together to find ways of making green bond more appealing to the market, he told the conference.

His comments come as investors have become more discerning about what they invest in, and have increasingly applied environmental, social and governance principles to their investments.

He said the fund was now requesting its asset managers to integrate ESG criteria into their investment analysts and was asking them to specify which ESG issues were critical to portfolio companies.

Asset managers were then held accountable for their choices, he said. If an asset manager chose climate risk as one of the most important risks for a particular company or industry, the fund would then follow up with the asset manager on how it dealt with the company and how it exercised its proxy voting.

"Some of the asset management companies should have received a much smaller check this year as we found a discrepancy between what they presented to us and how they practiced their promises," he said.