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Blue bonds and the ocean funding gap

Kristian Atkinson - Portfolio Manager

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‘Blue bonds’ that invest in ocean conservation may eventually replicate the success of their green (land-based) counterparts. But a win is not guaranteed - there are hurdles blocking the market’s development and its ability to plug the ocean funding gap.

Sewage and plastic stream relentlessly into our oceans. But where are all the fund flows?

Every year around $25 billion is invested in financing ocean conservation. Unfortunately, that’s about $150 billion short of what’s needed,[1] and that is a concern. The oceans act as a carbon sink, having absorbed roughly 40 per cent of carbon emitted by human activities since 1850.[2] The crisis of a warming planet won’t be solved without tackling the impact on oceans. 

Financial markets need to plug this funding gap, and oceanic ‘blue bonds’ may provide one way of doing so. These, like their terrestrial ‘green’ counterparts, channel funds raised by investors towards sustainable projects, although blue bonds focus on marine conservation. 

But there is a lack of interest in ‘blue bonds’, not just from investors but also issuers. As of the start of this year, they comprise less than 0.5 per cent of the sustainable debt market.[3]

A drop in the ocean

Why is this market so far behind and what can be done to accelerate its expansion? To start, blue bonds are generally issued by low-income countries that are heavily reliant on oceans and their resources. They tend to have poor credit ratings and are more exposed to extreme weather events, enough to turn-off large swaths of investors.

But sovereign blue bond issuances are not doomed to fail. One issued by The Bahamas last year was backed by a $200 million policy-based guarantee (PBG) approved by the Inter-American Development Bank (IDB). Not only did the PBG make the bond a healthy size ($385 million), it also helped to reduce risk, lending the deal a triple-A rating. Further collaboration between sovereign issuers and development banks could make the market more investable.

Better yet, the Bahamian bond was used to support local marine-focused businesses that will hopefully become profitable – providing returns to investors. This contrasts with the projects blue bonds are often associated with - such as ecosystem preservation - that generate low (if any) revenues, which puts off investors. Issuers should choose more commercially attractive projects to generate interest.

Authorities could help by creating a similar system as applies in green financing, where a price for carbon has been established, along with policies that ensure the ‘polluter pays’ to remove it. Blue bonds will only take off if there is a similar economic incentive to pursue those projects.

Clear market standards are also needed to avoid investors’ funds being misdirected towards projects that do more damage than good; or which are more grey than blue, as has become all too common with green bonds. This would be aided by an agreed taxonomy. Sectors associated with the sustainable use of ocean resources for economic growth are described as ‘blue economy’, but it’s a vague term, often including unsustainable extractive industries that may supply resources needed for the energy transition, but can also damage local ecosystems.

Help is on the way: a consortium led by the International Capital Market Association (ICMA) is due to release a long-anticipated Blue Bond Guidance framework soon. This is a necessary, but not yet sufficient, step in the right direction. Misallocations in the green bond market (for which there has been an equivalent framework in place since 2017) suggest issuers can bend the rules, sometimes blatantly. A $1 billion green bond issued by the Hong Kong Airport Authority last year was used to fund the building of a third runway. As much as the company claims it is investing to mitigate its environmental impact, it is hard to see how an airport extension can constitute a ‘green’ project.

It is even easier to misallocate funds in the blue bond market given the difficulties with measuring progress. Whereas the green bond market predominantly uses one metric - tonnes of carbon emitted - there is no universal method for measuring marine health.

Only when investors are easily able to measure the impact of projects will they develop confidence in the market. To that end, the taskforce on nature-related financial disclosures (TNFD) framework is designed to help organisations report and act on nature-related risks. But here lie familiar issues: with no one obvious metric in place, the TNFD’s approach is to align with the goals of no net biodiversity loss by 2030, and net gains by 2050. But defining what counts as ‘nature positive’ and proving those gains could end up being just as problematic as measuring progress in the first place, and ultimately deter companies from buying in to such frameworks on a wide scale.

This is where investors need to step in. Sustainable capitalism works best when investors engage with companies to help them comply with regulations and adopt the correct frameworks. Even if metrics appear convoluted for now, wider adoption could trigger a virtuous cycle: greater disclosure will lead to improved targets, achieving those targets will require capital, which will fuel the growth of markets like those of blue bonds.

The popularity of green bonds shows that the capital is out there - the task now is to mobilise it.

[1] ocean-financing.pdf (deloitte.com)

[2] “Global carbon budget 2019,” Earth System Science Data, 2019, Volume 11, Number 4.

[3] “The Blue Bond Market: A Catalyst for Ocean and Water Financing,” Journal of Risk and Financial Management, 2023, 16, 184.

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