Sustainable finance has become a must. It is at the root of more and more financial products geared towards supporting environmentally and socially responsible projects, such as green bonds. Blue bonds, which have a more specific role in environmental protection, are now also on the market.
Almost 70% of the Earth's surface is covered by water. This statistic is a clear reflection of the magnitude of our planet's seas and oceans. In addition to being home to hundreds of thousands of different species, the marine ecosystem also absorbs more than a quarter of all CO2 produced by human activity, traps excess heat in the atmosphere to regulate the Earth's temperature, and generates half of all of the planet's oxygen.
The role of our oceans and seas in the economy is vital. They provide natural resources and employment for millions of people with jobs in fields like fishing, maritime transport, underwater mining, renewable energies, coastal tourism and many more. According to data from the UN Global Compact, it is estimated that all of these productive sectors, also known as the blue economy represent approximately 2.5% of global GDP (Gross Domestic Product). Even more, that a country with such a GDP would be one of the world's most powerful economies.
As such, in recent years there has been a rise in initiatives aiming to mitigate the damaging effects of climate change on oceans, alongside a drive for new sustainable financing models. One such instrument is blue bonds.
Traditional bonds are a financial instrument used by private companies and public administrations to attract long-term investments. In exchange, they offer return of the money put in plus previously agreed interest. They are, therefore, a fixed income product. Blue bonds work in the same way than traditional bonds but are different in that the entities issuing them are determined to use the resources generated – or a large proportion thereof – for the protection and conservation of marine ecosystems.
There are a series of criteria that must be adhered to in the issuance of green bonds. Similarly, blue bonds have stipulations and best practices that interested parties must respect when using them. Three of the main ones are:
Use of the funds
What the economic resources will be used for is, of course, the main condition for considering issued bonds to be blue. As well as projects that are directly linked to oceans and seas, it is also possible to finance projects that improve sea workers' conditions or that guarantee access to drinking water in coastal communities, for example.
In order to issue these types of bonds, private companies and public administrations must demonstrate that the projects that the funds are part of their corporate or governance strategies, and not just a means of attracting financing. Initiatives must also be in line with the United Nations' Sustainable Development Goals (SDGs) aimed at eradicating poverty and protecting the planet.
Issuing entities are responsible for providing the required information, not just in relation to the use of economic resources but also as regards the studies and research used for the projects, and for sharing data with respect to the impact of their activities on the ecosystem.
The Seychelles, an archipelago in the Indian ocean, was the first country to issue blue bonds. An issuance of 10-year bonds was made in 2018, raising 15 million dollars. Said funds are to be used in the transition towards a sustainable fishing industry, as well as to extend the protected marine areas surrounding the country and facilitate investment in businesses that conduct blue economy activities in general.
Since then, the supply of blue bonds from both public administrations and private companies has kept growing, as has the interest of investors in using their capital to support initiatives seeking to preserve marine ecosystems. In fact, in the last two years, 12 issuances have been made with a value of 2.856 billion dollars. Below are some options that you might encounter on the blue bonds market:
In summary, blue bonds are not only a long-term investment product, but also have become an opportunity for organisations and investors to contribute to the protection of marine ecosystems and, generally, to the preservation of the planet.
In addition to thinking about environmental sustainability, in recent years the need to think about the sustainability of society itself has increased. As such, there are also bonds designed to achieve these types of goals. If you want to find out more, Openbank has written this article about the similarities and differences between green bonds and social bonds.