Approximately 71% of the earth’s surface is covered by water, yet bonds designed to support marine conservation are so far only a small segment of the fixed income market. Aysha Gilmore investigates why.
With oceans being nature’s largest carbon sink and providing 50% of the oxygen we need, it is difficult to see why the UN’s Sustainable Development Goals 6 (clean water and sanitation) and 14 (life below water) are significantly underfunded.
Targeted green and sustainable bonds seem to have taken off over the last decade or so but blue bonds, designed to support sustainable marine and fisheries projects, have not.
Some suggest that the blue debt market is where the green bond space was 12 years ago, with the green bond space valuing $2trn.
From 2018, when the Seychelles issued the first blue bond, to 2022, there were only 26 blue bonds, with a cumulative value of approximately $5bn, representing less than 0.5% of the sustainable debt market, according to a paper from the University of Colombia’s Pieter Bosmans and Frederic de Mariz.
Currently, the blue bond market stands at a modest $12.6bn but this is expected to grow somewhat in the next couple of years. Willem Visser, sector portfolio manager, impact and emerging markets at T.Rowe Price expects $2.5bn of potential issuance of blue bonds in the next 12 months.
Alongside this, some investors have committed to the space, with pension funds that have committed to the asset class being based in the Nordics.
Only last month, Sweden’s AP7, AP2 and AP3 backed the World Bank’s SEK2.6bn emerging markets blue bond, which is designed to promote ocean-friendly projects and improve access to clean water.
AP7, which has SEK1.1trn in managed assets, has also committed SEK1bn to the Asian Development Bank’s blue bond, which aims to finance projects in Bangladesh for flood and drought management and those in the Maldives to reduce disaster risk.
Talking to Net Zero Investor, Ulrika Lindén, senior portfolio manager at AP7, explains that blue bonds are a “powerful financial mechanism to support ocean-based climate solutions”. Overall, reducing carbon emissions, restoring ecosystems and enhancing climate resilience.
“Blue bonds especially target the oceans’ role in climate change to keep greenhouse gases and temperature rise down,” Linden says.
Alongside AP7, AP3 comments that the pension fund decided to invest in the space following an active decision to earmark capital to water projects and previous participation in the green bond market.
“Our ambition is to continue to invest in more blue bonds as long as their use of proceeds along with a decent return on investment aligns,” a spokesperson from the fund told Net Zero Investor.
However, current investment in blue bonds is a drop in the ocean compared to what is needed, with an estimated $175bn of investment a year required to conserve the oceans, according to a report by Deloitte.
Thomas Eveson, global lead for sustainable finance at the research firm Morningstar Sustainalytics, explains that the limited financing for marine conservation projects is not due to a lack of demand from investors, but rather a shortage of blue bond issuances.
Eveson tells Net Zero Investor that this is partly due to “uncertainty” in the blue bonds market. The problem lies in the lack of “clarity and definition” surrounding this type of debt, and there is a need for a more “concrete foundation” within a more structured and clearly defined industry.
“There is demand, and certainly hundreds of industries and numerous technologies show that this sector will grow. But I think we're still seeking clearer definitions and guidance so that corporate issuers, especially those entering the market, will feel confident that they’re doing it properly,” he said.
Only recently, ICMA and IFC introduced guidelines and frameworks to clarify what would qualify as blue-eligible project categories to include in the bonds. As a result, up until now, most issuers of blue bonds have been sovereign nations or multinational organisations.
Visser also backed up Eveson’s point, suggesting that: “The absence of standardised definitions for what constitutes a blue bond can create confusion, impede market growth, and discourage companies from issuing blue bonds.”
Alongside this, both Visser and Eveson highlight that one of the reasons for the limited issuance of blue bonds is the insufficient number of eligible projects, which makes the need for clarity on guidelines even more crucial.
Eveson also noted that the lack of uptake in the blue bond space is partly due to the “overlap” with green bonds and general sustainable bond principles. He explains: “This is simply the isolation of a specific environmental area that would have previously been covered quite comfortably within the green bond framework.”
According to T. Rowe Price, currently, the majority (over 60%) of the use of proceeds from green bonds is allocated to renewable energy, energy efficiency, or green buildings, while less than 10% is directed towards ocean-friendly and critically important clean water projects.
Another factor contributing to the limited issuance of blue bonds is the high costs involved, though these are expected to decrease as the market matures and more issuers enter the space.
However, there aren’t just issues when it comes to issuing blue bonds, there are also hurdles from an investment perspective.
Linden from AP7 outlines that there can be difficulty when measuring their impact on greenhouse gas reduction due to “the complexity of marine ecosystems, long timeframes for carbon sequestration, and challenges in monitoring”.
“With proper KPI tracking and transparent reporting, blue bonds can make a significant contribution to fight climate change while fostering sustainable use of marine resources.
“Quantitative KPIs can be tricky, but the investments still need to be done.
“The fact that it’s harder and not so precise to measure, doesn’t mean that we cannot do it. We just have to find ways,” she adds.
Lars Lindblom, portfolio manager for green, blue and social bonds at AP2, also points out that there needs to be transparency and information about issuers and how they are choosing to invest to address sustainability issues.
“Our view is that the traditional bond market will change as investors will demand increased transparency regarding the issuers’ sustainability strategy, and the labelled market leads the way.”
Currently, AP2 invests in blue, green and sustainability linked bonds to integrate sustainability into its fixed income portfolio, Lindblom adds.
Despite the funding gap and the challenges in the blue bond space, the appetite among investors to commit capital and issuers to offer blue bonds is growing, as awareness of the importance of oceans and clean water increases.
Promising steps have been made, including regulations from the ICMA and the IFC, as well as SEB, the founders of the green bond concept, recently establishing a water department.
All these developments signal how crucial all aspects of water could become.
“Ultimately, I am hopeful that, although currently in its early stages, given the immense importance of the blue economy, we will see a rise in issuances over the next 3-5 years,” Visser added.