Capital Market Innovation: Waves of Impact with Blue Bonds
The blue economy, valued at around $1.5 trillion today, is poised for a significant expansion over the next decade. By 2030, it is expected to double in size, reaching an impressive $3 trillion, and creating 40 million jobs, making it the eighth largest economy in the world, with an asset value estimated at a staggering $24 trillion.
Blue bonds, an innovative financing mechanism, are at the heart of this growth. These bonds are typically used for large-scale infrastructure projects related to the blue environment, including maritime transportation, marine renewable energy, coastal ecotourism, sustainable energy, marine fisheries management, sustainable aquaculture operations, seafood supply chain sustainability, clean water and waste water management, and port infrastructure.
However, the blue bond market is not without its challenges. Concerns over greenwashing, the practice of misrepresenting the environmental benefits of a project, have surfaced. To address this, debt-for-nature swap structures have been employed by several countries, including Seychelles, Indonesia, Colombia, Gabon, Belize, and Barbados, to finance blue projects. In these structures, a developing country's external debt is forgiven or reduced in exchange for local environmental conservation measures.
Issuing a blue bond under United Nations guidance involves a series of key steps. First, a clear sustainability or blue financing framework is developed, defining eligible projects linked to ocean conservation, sustainable fisheries, or climate-resilient coastal infrastructure. This framework aligns with international standards such as the Green Bond Principles to ensure transparency and integrity in use of proceeds.
Second, governance and management processes are established, involving dedicated working groups and risk management systems to oversee the issuance and use of proceeds. Treasury or finance departments track proceeds allocation through internal tracking tools, ensuring all funds are used as committed, often within a defined timeframe.
Third, collaboration with technical partners like the UNDP is crucial. The UNDP plays a coordinating and capacity-building role, translating national Sustainable Development Goal (SDG) priorities into investible bond frameworks and providing expertise on sustainability frameworks, stakeholder engagement, and market entry support.
Fourth, the bond issuance is structured with financial institutions and partners. Banks may act as lead arrangers and structurers to place the bond with investors, sometimes via private placement, ensuring alignment with blue bond market practices and investor expectations.
Fifth, proceeds are allocated and managed transparently, with unallocated funds temporarily invested in liquid, low-risk instruments to preserve capital until deployment to eligible projects.
Lastly, a commitment to periodic public reporting on use of proceeds and environmental/social impact outcomes is made to maintain investor confidence and demonstrate measurable benefits aligned with the blue economy.
As the blue bond market continues to grow, with significant growth since the first blue bond was issued in 2018, these instruments are increasingly seen as a way of addressing the underfunding of SDG 14 (life below water). For more information on blue bonds, resources can be found at the International Finance Corporation, ICMA, UN Global Compact, and World Economic Forum.
Sources: [1] United Nations Development Programme (UNDP). (2020). Blue Bonds: A Guide for Developing Countries. [2] United Nations Development Programme (UNDP). (2019). Blue Bonds for Ocean Conservation: A Tool for Sustainable Finance. [3] World Bank. (2018). Blue Bonds for Ocean Conservation: A Guide for Governments.
Contributed by Sienna Feshias.
- By employing debt-for-nature swap structures and issuing blue bonds under United Nations guidance, countries are investing in environmental-science projects like ocean conservation, sustainable fisheries, and climate-resilient coastal infrastructure, which are vital components of the blue economy.
- To attract more finance and investing in the blue bond market, it's essential to adhere to international standards such as the Green Bond Principles, establish robust governance and management processes, and collaborate with technical partners like the UNDP, ensuring transparency and alignment with blue bond market practices and investor expectations.
- As climate-change threatens marine ecosystems and the blue economy, blue bonds are emerging as an innovative financing mechanism for large-scale infrastructure projects that not only foster economic growth by creating jobs but also protect the environment for future generations.
