Blue bonds are at a nascent stage of development, but they have the potential to direct capital to conserve marine ecosystems and mitigate the significant environmental and economic risks associated with ocean exploitation. Our team discuss how key hurdles facing this market are beginning to recede and why this could represent the start of a new growth phase for this crucial type of sustainable bond market.

Key points

• Oceans play a vital role in the global economy and perform crucial ecological functions. Their unsustainable exploitation will have significant negative environmental, social and economic implications.
• Blue bonds can offer a solution by helping to direct capital to specific firms and initiatives crucial to conserving marine ecosystems, enabling investors to contribute to this important cause.
• Two of the key hurdles that the market has faced are beginning to erode - the lack of standardised guidance and the lack of the corporate issuance. This could mark the start of a new growth phase for blue bonds.

Oceans play a vital role, providing essential products and services such as food, energy, transportation, and tourism. These sectors contribute $2.5 trillion to the global economy every year and have an asset value of at least $24 trillion¹. It's not just about the economic benefits, oceans also perform crucial ecological functions like sequestering carbon and regulating the Earth's temperature. Our oceans are of immense environmental importance, holding 42 times more carbon than the atmosphere and are responsible for roughly half of the oxygen production on Earth^2,3. In addition, oceans and related ecosystems have a vital role in maintaining an ecological balance among the various species in ecosystems like estuaries, coral reefs, mangroves, kelp forests, and the deep sea.

However, the unsustainable exploitation of the ocean is putting these ecosystems at risk. Not only endangering the delicate ecological balance but also threatening their economic value. One example of this is overfishing, which has caused global fisheries to lose out on $83 billion in economic benefits annually, according to the World Bank⁴. Despite this fundamental economic and social role, water pollution, including chemical pollution, has significantly harmed these ecosystems. Overfishing depletes fish stocks and disrupts the natural order of the ocean's food chain. Additionally, climate change caused by human activity has led to increased sea surface temperatures and ocean acidification, negatively impacting estuaries, coral reefs, and waterways.

This has implications for investors

Ocean and water based resources are essential to human society, providing jobs for almost 40 million people, the majority of whom live in developing countries⁵. A recent study by the WWF has found that 66% of global listed companies could be exposed to value at risk of up to $8.5 trillion over the next 15 years if no action is taken to secure a sustainable ocean economy⁶.

The risks to global finance will be exacerbated by the debt distress by developing countries, which are most vulnerable to climate change. Countries which are most exposed to the environmental challenges are often those least able to finance the resilience. According to the International Monetary Fund (IMF), 34 of the 59 developing countries most vulnerable to climate change are also at high risk of fiscal crises⁷. However, new debt instruments such as ‘debt-for-nature swaps’, a form of blue bond financing can help such countries to alleviate their debt distress and at the same time help in the conservation of biodiversity.

Blue bonds have a vital role to play

According to the UN, $175 billion per year is needed to achieve SDG 14 (Life Below Water) by 2030; and yet, only around $10 billion was invested between 2015 and 2019. In addition, Global Waters finds the total funding required for SDG 6 (Clean Water and Sanitation) to be $263bn⁸. Water related environmental issues are also interconnected with climate change and hence, are crucial in enabling wider sustainability goals.

Blue bonds offer a solution to the underfunding of SDG 14 and SDG 6, helping to direct capital to specific firms and even individual initiatives, crucial to conserving marine ecosystems and enable investors to contribute to this important cause.

The continued success of blue bonds will require active participation of investors, development banks and other capital market stakeholders. Various stakeholders have already begun to show their interest in being involved with these initiatives. As investors look to put their capital to use and contribute towards helping the issues that the world’s oceans and freshwater face, they are turning to a new type of use of proceed bond, aimed at conserving our oceans' biodiversity, economic value, and overall ecological balance has emerged, called blue bonds.

Blue bond issuance takes two forms:

• Firstly, a regular use of proceed bond where funds are specifically directed towards assisting with marine conservation. An example of this is by the Seychelles, who launched the world’s first sovereign blue bond in 2018, raising $15m to support its ocean economy⁹. This issuance provided targeted funding towards improved governance of fisheries and the development of the Seychelles’ blue economy, a crucial pillar of Seychelles' broader plan for sustainably managing and protecting its 1.4 million km2 marine environment¹⁰.
• Secondly, a “debt-for-nature” swap in which blue debt is raised, typically in conjunction with a national or supranational organisation. Subsequently the issuer restructures the outstanding debt in the market, with creditors swapping their prior sovereign debt for sovereign blue bonds. In return for the assistance the government issuer will direct the additional capital to finance a variety of marine conservation projects. An example of this is by Gabon, backed by the US International Development Finance Corporation (DFC). The savings totalled $125m and the additional capital was used to finance a variety of projects selected and executed by The Nature Conservancy, a global environmental non-profit organisation¹¹.

Recent ICMA guidance provides the market with a turning point…

Up until recently, there have been two key factors stunting the growth of the blue bond market. The first was the lack of clear market standards to avoid the misdirection of investors’ funds. However, the recent guidance by the International Capital Markets Association (ICMA) is a key catalyst for the blue bond market. In September 2023, ICMA published new guidance on “blue-themed bonds”, treating blue bonds as a subset of the larger green bond market, as seen in Figure 1.

Therefore, the guidance from ICMA builds upon pre-existing regulation, such as ICMA’s Green Bond Principles and utilises marine economy-specific guidance such as UNEP Sustainable Blue Economy Finance Principles and associated Blue Finance Guidance. This guidance marks a turning point in setting out robust frameworks for increasing the effectiveness and transparency in the blue bond market.

Type of use-of-proceeds bonds

Investing in blue bonds provides opportunities to support the ocean-based economy, which sustains nearly three billion people with food, jobs, and income. These bonds not only aim to increase the sustainability of our oceans but also drive economic value. Projects funded by blue bonds range from pollution prevention and wastewater management to the conservation of marine protected areas. They include initiatives like the conservation and governance of fisheries, investment in sustainable marine transport, renewable energy projects, and promoting sustainable tourism and wastewater treatment.

Meeting UN SDG 14 by 2030 will require a significant investment and blue bonds can help bridge this funding gap, to provide a wider pool of investors with investment opportunities. By attracting international investors, the cost of capital can be lowered by 8%. And with the involvement of multilateral development banks and public-private partnerships, the cost can be reduced by more than 30%¹². Blue bonds therefore can provide investors with a route to driving solutions and enacting change for ocean conservation.

… and corporate issuers have begun to take note

The second critical issue that has been a roadblock to the growth of blue bonds is that of the lack of corporate issuance. Up until the ICMA guidance there was just one private blue bond issuance, done by Ørsted in 2023. Ørsted became the world’s first energy company to issue blue bonds. Issuing a five-year, EUR 100 million blue bond in a private placement format in accordance with the IFC Blue Finance Guidelines¹³.

However, the shift of corporate issuers taking note of the blue bond market has begun to occur. This has been demonstrated in early 2024, when Japanese shipping major Mitsui O.S.K. Lines (MOL) issued blue bonds amounting to JPY 10bn. The proceeds from these bonds contribute to a sustainable blue economy. For example, through their zero emission ship (Wind Hunter) and wind-powrered cargo ship (Wind Challenger)¹⁴.

Summary

Blue bonds are at the nascent stage of their growth, having taken some time to expand their appeal for investors and issuers alike, demonstrated by just 26 blue bonds issued since 2018, at a cumulative value of $5bn¹⁵. This is in comparison to total green, social, sustainable and sustainability linked (GSSS) bonds, which reached an estimated $4.7trn as to September 2023¹⁶.

Two of the key hurdles that the market has faced are beginning to erode, being the lack of standardised guidance for investors and the lack of the corporate issuance. While the guidance from ICMA must go further in applying their rules to water more generally rather than solely to SDG 14, it marks a turning point in how issuers can think about and engage with blue bonds and hopefully is the start of a new phase in the growth for this crucial type of sustainable bond market.

¹ WWF, 2015. Reviving the ocean economy.

² World Resources Institute, 2022. Ocean-based Carbon Dioxide Removal.

³ National Ocean Service, 2020. How much oxygen comes from the ocean?

⁴ World Bank, 2017. The Sunken Billions Reinvested.

⁵ OECD, 2016. The Ocean Economy in 2030.

⁶ WWF, 2023. Navigating Ocean Risk.

⁷ IMF, 2022. Swapping Debt for Climate or Nature Pledges Can Help Fund Resilience

⁸ Water Unite, 2023. 5 barriers to accelerating SDG 6 in 2023.

⁹ The World Bank, 2018. Seychelles: Introducing the World’s First Sovereign Blue Bond

¹⁰ Calvert Impact, 2018. Seychelles Blue Bond.

¹¹Fidelity International, 2023. Gabon shows how to make blue bonds work.

¹² The Economist, 2023. Bridging the ocean finance gap.

¹³ Ørsted, 2023. Ørsted becomes world’s first energy company to issue blue bonds.

¹⁴ Offshore Energy, 2023. MOL to issue world’s first blue bonds in shipping.

¹⁵ ESG Investor, 2023. From Green to Blue.

¹⁶ World Bank, 2023. GSSS Quarterly Newsletter Issue No 5

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