The Blue Bonds: investing for cleaner oceans, diverse marine life and healthier ecosystem

Have you ever thought of how our world will look like 100, 50 or even 10 years from now? When I get a chance to ask this question, I hear most people talk of how technology will make our lives easier. And, sure, that is a comforting thought. Yet, before we start thinking of all the “good” that future innovations can bring us, should we not also ask ourselves if we‘d still be able to live a pleasant life on our planet in the near future?

Coming from a very polluted port town of Russia, I believe a good starting point to this discussion would be oceans, in which the first species of our planet (fish) were vegetated. A massive influence of the oceans on an overall ecosystem of Earth is often overlooked, but can not be underestimated. Our ocean system performs a couple of key functions:

• Oceans produce 70% of oxygen we breathe and absorb 80% of carbon dioxide released across the planet
• Oceans are a primary source of income and jobs for coastal economies (think of islands and port towns)
• Oceans are a source of seafood — a sustainable alternative to animal proteins coming from beef, chicks and other livestock raised on farming facilities, which produce unsustainably high levels of greenhouse gas emissions
• Besides seafood, oceans are also a source of important food ingredients for manufacturing basic goods like toothpaste, peanut butter and soymilk
• Marine animals release chemicals used in medicines treating illnesses such as Alzheimer’s disease, arthritis and cancer
• Finally, being next to the ocean is a truly recreational experience. Just think of many nice things you can do: swimming, kayaking, fishing or simply enjoying the view! And wouldn’t it just feel nicer to sightsee a clean ocean?

Clearly, preserving health of our oceans is a key consideration in ensuring our planet’s continuity, which our entire humanity’s existence hinges on; however, amount of money invested (in the ongoing ocean initiatives) is modest. Of the 17 UN Sustainable Development Goals, designed to achieve a better sustainable future, the Goal #14 (on sustainable use of the ocean and its resources) attracts the lowest share of investment (3.5%). So it seems that care for oceans is at the bottom of the priority list on Sustainable Development, thus naturally raising the question of whether it is economically viable to invest in oceanic and marine initiatives?

Sustainable Development Goals (SDG) Framework set by United Nations

This brings us to the topic of today’s article. Blue bonds are one of the newer forms of sustainable debt investing, focused specifically on the initiatives benefitting the health of our oceans. Such projects may include, but aren’t limited to: removal of plastic waste from the oceans, promotion of sea life biodiversity, and financial support to countries for which fishery is a key pillar of economic growth. The money are provided by a consortium of large institutional investors and backed by the faith of supranational global organizations. The issuers of the blue bonds (in effect the borrowers of the capital) are government bodies or key financial institutions with credit capacity to take on large amounts of debt.

Evolution of Sustainable Bond financing (Source: Morgan Stanley Institute of Research for Sustainability)

Among others, Seychelles is one of the islands that could prosper significantly from improving ecosystem of the surrounding waters. Seychelles produces over 150,000 tonnes of fish every year, of which at least 60% is exported. Thus fishery plays a key economic role in island’s development. It is therefore no surprise that The Government of Seychelles pioneered the use of blue bonds in October 2018, borrowing a total of USD $15 million (for a period of 10 years at a 6.5% annual interest return) from 3 social impact investment managers in the US.

Loan proceeds are being used to expand marine protected areas of the Seychelles island and improve governance of high priority fishery areas. The deal is backed by World Bank interest repayment guarantee and United Nation’s concessional loan (which covers 1/3 of the total borrowed amount). Support of supranational organizations had proven critical as it promoted an importance of the causes behind “blue financing” and offered the much needed credit protection to the social impact investors.

Eligible uses of the first blue bond proceeds (Source: OceanActionHub.org)

Soon after Seychelles issued the first ever blue bond, Nordea Investment Bank (which represents the interests of Baltic and Scandinavian states) had struck a 5-year blue bond deal for a considerably higher amount (of USD $200 million). The proceeds of the deal will be used to build better water preservation systems around a strongly polluted Baltic sea and prevent any future damages to the sea ecosystem (in light of the damages already inflicted over the past 20 years). This is a major success story in eyes of the market participants, given the blue bond issue saw a more than double oversubscription! Majority of the funds came from investors in Sweden.

Baltic Sea Shore: Saint-Petersburg (Source: EU Marytime and Fish)

Above projects certainly helped strengthen the case for blue bonds as a scalable investment theme, however there is still a lot more work to be done before blue bonds can acquire a global prominence. So what are the key challenges in scaling up the blue bond market?

• A more diversified issuer base is required. Thus far, blue bonds at large were issued by sovereigns and multinational banks. Attracting corporates to originate blue bond deals would be an important milestone in popularizing this investment theme. Firstly, engineering companies could benefit from improved marine ecosystem in planning and constructing water windmills. Secondly, coastal real estate owners could see a rise in value of their properties if those are surrounded by cleaner water reservoirs. Finally, companies from medical and health & beauty industries could benefit from an increased biodiversity of marine organisms in researching and developing new innovative products.
• Desirable are marine projects that can be financed through blue bonds of long maturity offering a mix of stable return and low level of risk — these features would attract funds from institutional investors, who make up for the biggest player in the sustainable debt investing market
• Laying out a framework that will give a broad sense of direction on what is considered to be “blue” practices in the market. Blue bond framework should offer guidance to less knowledgeable financial institutions on how a blue bond deal can be structured
• Recognized global institutions (such as UN Environment or World Bank) must design strict disclosure requirements on the use of blue bond proceeds and the expected impact. Blue bonds is still a very novel concept to both the impact investors and the borrowing institutions. Blue bonds’ impact reporting should give investors a better idea of where they invest their money, as well as provide them with a periodic update of progress made on the planned marine initiatives

So ultimately, it comes down to drafting commercially attractive marine initiatives that would challenge the existing unsustainable status quo practices around the world. With world slowly realizing the benefits of growing sustainability, blue bonds might just become another distinct sustainable debt investing theme of the future, on par with green bond investing.