Blue bonds are emerging as an innovative financing instrument to mobilize capital to solve social and environmental challenges, create sustainable ocean and water-related business opportunities, and signal responsible ocean stewardship in line with the SDGs and the Paris Agreement. A sustainable ocean economy can create a triple win for people, nature, and the economy by fighting climate change, providing nutritious food for a growing population, and providing almost unlimited renewable energy.
Sustainable ocean investments are on the rise. In a recent survey, 72% of investors classified the sustainable ocean economy as investable. Thousands of sustainable ocean ventures are emerging across all continents.
Blue bonds are structured in much the same way as any other thematic bond. As with standard bonds, they provide capital to issuers who agree to repay the debt with interest over time. Issuers of blue bonds, however, commit to using all or the majority of the proceeds to finance or refinance blue (ocean or water-related) projects.
Sustainable bonds are debt securities used to finance pre-defined sustainable activities, projects, or assets. The majority of these bonds issued are “use of proceeds” (UoP). Existing frameworks include green, social, sustainable and sustainability-linked bonds. For green and social bonds, the ICMA principles have helped standardize the market, providing a framework that covers the UoP, process for project evaluation and selection, management of the proceeds, and reporting. These frameworks enhance the thematic bond integrity and transparency, crucial for the expansion of this market.
WHY BLUE BONDS?
- Blue Bonds fund commitments towards oceans, water related initiatives and sustainability:
When a company issues a blue bond, it specifically commits to investing the proceeds on business solutions for oceanic health, freshwater and/or to improve access to water and sanitation.
- The blue economy can create a triple win for people, nature and economic development:
Maintaining a healthy and productive ocean is a critical precondition for the achievement of all 17 SDGs. Covering 70% of the planet, the ocean helps mitigate climate change by storing large amounts of carbon dioxide. Expanding the sustainable ocean economy will also provide food for a growing population and foster low-carbon transport. In addition, it offers the potential to provide almost unlimited renewable energy.
- Blue Bonds are not just for fisheries and shipping companies:
Blue use of proceeds can be allocated to sustainability projects that are directly operating in or by the ocean, seas and freshwater such as ports, shipping, infrastructure, tourism, fisheries, aquaculture, offshore renewable energy; and projects that have a direct impact on the ocean, seas and freshwater such as manufacturing, consumer-packaged goods designed for waste reduction, sustainable textiles, integrating SMEs with sustainable practices to increase value chain resilience, reducing agrochemical runoff, water and sanitation.
- Blue bonds are where green bonds were ten years ago:
Development finance institutions were important in building credibility around the green bond concept. IDB Invest is now committed to developing the blue bonds market in the same way, and can support companies interested in issuing blue bonds while attracting institutional investors.
Blue bonds, like green bonds, may generate additional costs for external reviews, reporting and internal preparation issuers are becoming increasingly aware of the benefits associated with thematic bond issuance, such as high demand and improved financing terms, including larger transaction size and longer maturities
THE BLUE ECONOMY
Ensuring a healthy ocean provides significant opportunities for business and economic growth. An overall reference for the challenge of balancing ocean protection and production is the Ocean Stewardship 2030 report published by the UN Global Compact. The report builds upon the 5 Tipping Points for a Healthy and Productive Ocean, which point to a number of blue opportunities to support the 2030 Agenda for Sustainable Development:
- Sustainable Seafood: Covering 71% of the earth, the ocean could sustainably produce significantly more food to provide adequate nutrition for the 820 million people currently estimated to be food insecure and achieve Goal 2, which promotes ending hunger and improving food security through sustainable food systems.
- Decarbonized Shipping: Shipping moves 80% of the world’s goods within and between continents and nations. Decarbonized shipping can be a key factor in reaching the SDGs through increasing sustainable global trade.
- Ocean Renewable Energy: Making ORE a key part of energy policy will support the greenhouse gas (GHG) emission reductions needed by 2030 to meet the Paris Agreement targets of achieving net-zero carbon by 2050 and limiting temperature change to no more than 2 degrees above pre industrial levels.
- End Waste Entering the Ocean: For the ocean to continue functioning healthily and provide the necessary resources to meet the SDGs, there is an urgent need to eliminate waste entering the ocean and move toward a circular economy and restore the health of the ocean
- Mapping the Ocean: Large parts of the ocean and seabed remain relatively unexplored. Greater ocean data will provide crucial information on marine ecosystems for climate change mitigation and adaptation, influencing how we interact with and manage the ocean to sustainably produce food and energy
OPPORTUNITIES FOR ISSUANCE
There are two key categories of blue bonds with relevance for IDB Invest:
- Projects that are directly operating in or by the ocean, seas, and freshwaters, such as ports, shipping, tourism, fisheries, aquaculture, offshore energy and water management; and
- Projects that have a direct impact on the ocean, seas, and freshwaters, such as consumer-packaged goods, agriculture, textile, water and sanitation, and infrastructure
| KEY AREAS (OPPORTUNITIES)|| SUSTAINABLE OCEAN RELEVANCE|
| Energy|| Offshore renewable energy|
| Transport|| Decarbonizing shipping, ports.|
| Agribusiness|| End waste entering the ocean.|
| Social Infrastructure|| Sustainable Seafood.|
| Aquaculture|| Sustainable Seafood.|
| Manufacturing|| End waste entering the ocean.|
| Telecommunications, Media and Technology|| Mapping the ocean, and Ocean data.|
| Tourism|| Ending waste entering the ocean, and Sustainable seafood.|
| Banks and Financial Intermediaries|| Financing will be a key enabler to accelerate ocean-based solutions.|
MOVING FORWARD: RECOMMENDATIONS TO ACCELERATE THE BLUE BOND MARKET
Scaling the market will require blue bond recognition, developing benchmarks around issuance size and terms, blue pipeline development, government and large corporate involvement, and strong reporting. While these are early days in the blue bond market, the following will help in evolving the market, similar to the green bond growth journey over the past decade:
- Create blue investment opportunities by increasing recognition of the vital role of the ocean in sustainable development: A healthy, productive ocean offers significant economic opportunities to support a growing population and mitigate environmental degradation. There is an opportunity for further work to provide guidance and relevant examples that relate to ocean stewardship along with a range of SDGs, to help companies identify relevant blue financing opportunities. Many bonds today that are labeled as “green” could also be considered “blue.” This is partly because blue projects may be labeled as green when they also benefit carbon emission reduction. A blue bond tag or label may facilitate the development of genuine blue bond issuances. It would also provide some clarity to investors who seek alignment with ocean sustainability. Additionally, education will be key in increasing awareness and understanding of the unique value proposition of blue instruments and their return on investment for the environment, society, and business.
- Collaborate with governments and multilateral development banks: Public-private partnerships will be particularly relevant given the smaller size of many companies in LAC, and particularly in Caribbean regions. The establishment of a fund or a vehicle that supports numerous smaller transactions may also defray transaction costs on a per-dollar basis. Government issuances, along with benchmark corporate issuances, will be important in building the market and quickly setting the stage for smaller market players to enter. Also, prioritization by multilateral development banks such as the World Bank and IDB Invest can build confidence to support issuers across a spectrum of sectors and sizes, thereby increasing access.
- Contribute to evolving standards for strong reporting to build a transparent and credible market: Blue taxonomies, criteria, metrics, and benchmarks are emerging in various ocean- and water-related sectors. Examples include carbon emissions in shipping fleets, IUU fishing catch, water intensity of production, freshwater table measurements, etc. There is increasing convergence around those types of UoP that could constitute a standard of their own or a commonly accepted standard to specific industries. There is also increasing convergence around what companies are being asked to report with respect to sustainability, given that sustainable operational practices are increasingly seen as a way to mitigate risk. The “Blue Projects” section in Annex 1 points to examples where blue metrics are steadily being developed.
Source: IDB Invest and UN Global Compact