Capital Market Disruption: The Impact of Blue Bonds on Traditional Financing
In a bid to address the underfunding of Sustainable Development Goal (SDG) 14, life below water, a innovative financing mechanism called blue bonds has emerged. These bonds, specifically designed to fund marine and ocean-based projects, are gaining traction as a means to facilitate sustainable solutions within the marine industry.
Blue bonds must contribute to particular SDGs adopted by the United Nations in 2015, with a focus on SDG 6 (clean water and sanitation) and SDG 14 (life below water). The key steps in issuing a blue bond typically involve project selection and eligibility assessment, structuring the bond, securing investors and arranging the issuance, and proceeds management and reporting.
Projects suitable for blue bond funding include ocean conservation initiatives, sustainable fisheries management, climate-resilient coastal infrastructure, pollution reduction, and marine habitat restoration efforts. A recent example of a blue bond is the €100 million issuance by the Development Bank of Latin America and the Caribbean, which supported ocean conservation, sustainable fisheries, and resilient coastal infrastructure.
Blue bonds provide economic, social, and environmental benefits to all stakeholders. They are seen as a way to double the blue economy, expected to reach U.S.$3 trillion by 2030, creating 40 million jobs, making it the eighth largest economy in the world, with an asset value estimated at US$24 trillion.
When issuing sovereign blue bonds, a debt-for-nature swap structure can be considered, which involves debt being forgiven or reduced in exchange for local environmental conservation measures. This approach has been utilized by countries such as Seychelles, Indonesia, Colombia, Gabon, Belize, and Barbados.
Blue bonds are considered a sub-type of green or Environmental, Social, and Governance (ESG) bonds. For a bond to be labelled "blue", the project that is funded should be consistent with the project categories of the International Capital Markets Association's (ICMA) Green Bond Principles (the GBPs).
The United Nations recommends that issuers take three key steps to issue a blue bond: align with global standards, develop a framework with clear targets and sustainability performance metrics, and set key performance indicators (KPIs) that are measurable and auditable. The framework should also consider the UN's Sustainable Ocean Principles and set blue criteria guided by the critical ambitions as set out in the Ocean Stewardship 2030 report.
The report sets out five tipping points to achieve a healthy and productive ocean by 2030: sustainable and fully traceable seafood, decarbonised shipping, harnessing ocean energy, mapping the ocean, and ending waste entering the ocean.
Investors in blue bonds generally include a diverse range of profiles, from high-net-worth individuals to venture capital firms and investment banks. The proceeds from blue bond issuances are best suited for large-scale infrastructure projects, such as maritime transportation and marine renewable energy.
Examples of projects financed by blue bond issuances include investments in coastal ecotourism, sustainable energy, sustainable maritime transport, sustainable marine fisheries management, clean water and waste water management, and port infrastructure. As the world continues to grapple with the challenges of sustainable ocean management, blue bonds offer a promising avenue for funding and implementation.
Investing in blue bonds could support projects like sustainable fisheries management, ocean conservation initiatives, and maritime transportation, thereby contributing to the finance sector's role in facilitating sustainable solutions within the marine industry and addressing SDG 14. Successful issuance of sovereign blue bonds, adhering to global standards and specific project categories, could potentially double the blue economy by 2030, creating millions of jobs and boosting the economy.
