Blue is the new Green:
the next wave of Sustainable Investing

LOGO Agef.bmp.bmp

Coming out of the blue? - We have all heard about Green Bond and its siblings: Social Bond and Sustainability Bond, but little has been written about the newborn of the credit family: Blue Bond. The latter one operates like any other debt instrument by providing capital to issuers in exchange for the nominal plus a little more. The main difference lies in its use of proceeds, which has to be closely tied to ocean conservation. Most institutional bodies - corporates, financial institutions, governments, and municipalities - can issue blue bonds to fund ocean-related assets and to deliver initiatives that support the SDGs (the United Nation’s 17 Sustainable Development Goals).

In October 2018, when the World Bank agreed to offload a small portion of the Republic of Seychelles’ debt, the first Blue Bond specified that the money was to be used for marine protection to promote biodiversity and support economies reliant upon healthy and sustainable fisheries. On the social side of the ESG spectrum, blue activities relate well to employment generation through small and medium sized finance and food security. There is no specific guidance for blue bonds, but the Capital Market Association (ICMA) oversees the standards of the sustainability bond category.

Source: Morgan Stanley Institute for Sustainable Investing (2019)

FIG 1.png

No green without blue - Contrary to popular belief, oceans capture more carbon than forests do. Aquatic ecosystems sequester up to 70 percent of anthropogenic (human-made) CO2 in biomass and sediments from mangroves, salt marshes, sea grasses and algae. They are 200 times more efficient than their green counterparts with respect to their mass.
Blue Bonds are not just for fisheries and shipping companies. The Blue or Ocean economy encompasses a broad array of economic activities, which have a direct or indirect connection to seas, oceans, freshwater or ports. Besides being the cradle of life, water is a nourishing space for economies who rely on shipping, tourism, fisheries, aquaculture and offshore renewable energy. According to the Economic Commission for Africa (2019), if the world oceans were a country, the Blue Economy would constitute the seventh economic super power in the world.
Water cleanliness, both a health and climate issue, is also depending on land projects that accelerate positive contributions or cancel negative impacts such as waste reduction in consumer-packaged goods, sustainable textiles, sanitation and agro-chemical runoff containment. To put things into perspective, Earth could have warmed by 36°C if excess heat from greenhouse gas had gone into the atmosphere instead. SDG 14 is intertwined with many other SDGs and blue bonds shall  symbolise the warhorse of the fight against climate change while fueling growth among developing nations.

Source: United Nations Sustainable Development Goals (2016

FIG 2.png

There is no more plenty of fish - Saying that “life below water matters” (SDG 14) is an understatement. Beyond fish and ships, over three billion people depend on marine and coastal biodiversity for their livelihoods. However, less than 3% of the ocean is highly protected (National Geographic). A recent study from KPMG showed that only 18% of companies are prioritizing  SDG 14, a drop in the ocean. An estimated $175 billion per year would be needed to fund SDG 14, which is equivalent to 0.08% of the 2020 US GDP, another drop in the ocean, especially considering that green bonds issuance alone are on track to hit $500 billion in 2021 (Climate Bond Initiative).
A lot of attention has been drawn to the Green Transition on land, but there is a monumental attention and funding gap when it comes to water. One possible reason is that ocean deterioration is a plural issue that is difficult to zero down on a single source. Another explanation is the conflicting relationship between biodiversity conservation and the fishing industry. It is also worth highlighting conflict of interests between agriculture and inland water pollution. SDG 14 is tightly linked to SDG 6 (Clean Water and Sanitation), hence the need to modernise port infrastructures, improve management of wastewater and control the quantity of fertilisers and industrial chemicals dumped in the soil to prevent pollution from reaching oceans.

Blue is not all roses - Blue bonds could be the key to reconcile local economies with complex ecosystems via responsible investing. They could be a boon to coastal developing nations like Africa, South America or the Caribbean by providing adequate food and fostering employment. However, blue bonds currently collide in two majors setbacks: the lack of traction and scalability.
Today, blue bonds are where green bonds were ten years ago. Issuances should accelerate in sympathy with other sustainability bonds as soon as SDG thematic investing start gaining momentum. A 2020 Credit Suisse survey found that 75% of investors had not assessed their portfolios for their impact on the ocean, but 90% were interested in investments related to the Blue Economy. First and foremost, blue carbon needs to be officially recognised as a nature based solution in the global decarbonisation agenda. Furthermore, rating agencies and third-party verifications must ensure that proceeds are genuinely used in a sustainable manner because in the absence of clear product specification and controls, blue bonds would lose legitimacy and resemble “blue washing”.

Sources: FT, BofA Global Research estimates, Bloomberg Finance LP

FIG 3.png

Blue bonds’ other pitfall lies in its revenue model. Currently, these projects rely mainly on government aids and levy charges on the beneficiary of the action. Unfortunately, it is so complex to identify the polluter and the beneficiary that government agencies often end up paying the bill. This model is not self-sustainable by essence since there is a limit to how much of taxpayer money can be given out to clean the ocean. However, an engineered blue bond including a recovery feature could be the solution.
Let us imagine a mutually beneficial bond between investors and fishers that takes place in two stages. In stage one, fishing companies accept to cut their wild catch production for five years. During this restraint period, investors absorb their profitability hit. After fish stocks recover, fishing companies are allowed to scale up their activities, but in a sustainable way. They repay investors in the form of a coupon until the bond’s maturity. If fish stocks are not deemed to be sustainable, investors have lost their money. If fishing companies fish more than they are allowed to, they have to refund the cash received. Such Blue Recovery bond model could be replicated in many areas where natural resources were over exploited and give birth to a truly sustainable economy.

Mathias Talmant
Junior Portfolio Manager
FARAD Investment Management S.A.