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2018:  JAN | FEB

Blue Bonds: A Growing
Investment Vehicle

Paul Holthus,
World Ocean Council

In the past decade, institutional investors have sought to develop bond financing for environmentally sustainable projects, usually focused on climate change mitigation and adaptation. Climate bonds and green bonds have been created as a vehicle for this new focus of financing, usually for infrastructure, e.g., coastal protection and wastewater management.

Bonds are used by financially credible institutions to borrow and lend significant debt capital for upfront funding or refinancing. The principal is paid back at a defined date, with regular interest payments over the life of the bond, creating certainty for bond issuers. Bond investment confers no equity in the organization raising the funds. Instead, bond investors are seeking scale and liquidity and usually have lower risk appetite. Repayment is linked to the issuer’s overall creditworthiness and is not related to the cash flow from specific projects. The bond market is estimated to be up to $100 trillion overall.

Since its first green bond of $410 million in 2008, the World Bank has issued around $8 billion by 2015 across 40 transactions. Municipal governments and corporations have subsequently developed green bond products, with the issuance growing from $11 billion in 2013 to more than $100 billion by 2016. There is currently an excess demand for green bonds, as policy drivers and market interest continue to propel them from a niche investment vehicle to the mainstream.

Institutional investor interest is now turning seaward toward blue bonds as a way to diversify portfolios and invest in the growing blue economy. To date, one of the main drivers has been the need to fund the transition of fisheries and seafood supply chains to sustainability, with initial blue bonds issued by governments or development banks. However, interest in blue bonds is rapidly expanding to other sustainable marine businesses and could become a standardized way to raise capital.

The relatively small size of many fishery-related businesses and their financial needs have created difficulties in the development of blue bonds. This issue would likely create challenges for the ocean technology sector as well, but there are ways to address this. For example, asset-backed bonds can be issued backed by the cash flows from a pool of investment opportunities, or standard treasury-style bonds can also be used to raise capital, which is then distributed across a variety of projects.

For blue bonds, the focus now is on developing criteria that can be used by bond issuers who are seeking certification. The certification is a verification tool to assist investors and issuers in prioritizing investments that contribute to addressing sustainability in ocean development.

In 2016, work began by an investor-focused not-for-profit organization to develop criteria for blue bonds covering marine renewable energy, fisheries, aquaculture and coastal infrastructure.

The draft criteria are initially prepared by a multisectoral, expert technical working group (TWG). The criteria are then reviewed by an industry working group (IWG), which brings together organizations from the marine, investor and verifier community. As announced by the World Ocean Council (WOC), the draft criteria for bonds addressing marine renewable energy were released a few months ago for a public consultation and comment period. Draft blue bonds criteria for fisheries, aquaculture and coastal infrastructure will be made available in the months to come.

The WOC is a member of the IWG that is developing the draft blue bonds criteria and can facilitate the involvement of the sea technology community in the process. More broadly, the WOC Ocean Investment Platform is being developed as an ongoing structure and process for accelerating investment in technology and innovation that provides solutions to ocean sustainable development, science and stewardship challenges.

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