From Green to Blue

To boost sustainable investment in ocean economies, the International Capital Market Association, in partnership with other industry bodies, has consolidated existing blue finance guidance and principles under one framework.  

As of January 2023, green bonds had raised US$2.5 trillion globally, according to the World Bank from a mere US$15 billion in 2013. Part-credit for this meteoritic growth has been given to the Green Bond Principles (GBP) launched in 2014.

The GBP were created in 2013 by a group of financial institutions, who then asked the International Capital Market Association (ICMA), to provide its secretariat, explains Simone Utermarck, Director, Sustainable Finance at ICMA.

Some of these underwriters are still part of the executive committee of the principles which also contains issuers and investors in equal parts, continues Utermarck. Following the GBP, other principles have been developed, such as the Social Bond Principles (SBP), and the Sustainability Bond Guidelines (SBG), “which are a mix of the Green Bond Principles and Social Bond Principles,” she explains, as well as the Sustainability-linked Bond Principles.   

The executive committee continues to oversee updates that the market signals are needed to the principles and relevant guidance.

Utermarck says that this model has driven the success of particularly green bonds, of which 98% of global issuances are aligned to the GBP. “The principles give a standard to the market and their benefits are reflected in the wide use,” she says. “They also help investors with what to expect.”

With this in mind, the ICMA has now released blue finance guidelines to try and drive similar success in that market in collaboration with the International Finance Corporation (IFC) – a member of the World bank Group, United Nations Global Compact, United Nations Environment Programme Finance Initiative (UNEP FI) and the Asia Development Bank.

Between 2018 and 2022, 26 blue bond transactions took place, amounting to a total value of US$5 billion, with a 92% compound annual growth rate between those years. This represents 0.5% of the sustainable debt market.

Growing the nascent blue bond market is seen as vital as one way to protect the ocean facing severe degradation from human activity, when its importance for humanity’s food systems, livelihoods and prosperity is well understood. Marine ecosystems and biodiversity are a primary source of protein to 17% of the world’s population, for example.

Breakthrough international agreements are already sending market signals that ocean health is becoming an investment risk and opportunity. There is the March 2022 resolution to ‘End Plastic Pollution’ and develop an internationally legally binding agreement by 2024 to shift away from single-use plastics and invest in circular solutions – a move could heavily impact the business model of many food and beverage companies.

Also, the 2030 Kunming-Montreal Global Biodiversity Framework included a target to protect at least 30% of land and ocean globally by 2030 and in March 2023, the UN High Seas Treaty was agreed.

How important will the blue bond guidelines be for investors?

According to Imane Kabbaj, Director of Responsible Investment at Man Group, the new blue bond guidelines published by ICMA will be a great tool to establish the credibility of – and a framework for – this new debt instrument. “Frameworks help provide a structure and expectations about what proceeds, measurement and reporting will be,” she explains. “And this is key not only to create a level-playing field in the industry, but also to help investors support their ESG claims.”

Utermarck also notes that the guidance clarifies that blue bonds are viewed as a theme, and align with existing principles such as the Green Bond Principles and the Sustainability Bond Guidelines. She adds that, this is why ICMA partnered with other organisations such as the IFC and UNEP FI, “because they all have their own specific guidance for blue….we combine this so the guidance draws on that”.

What are the notable blue bond issuances?

Kabbaj says: “It’s very hard to single out a specific issuance here; but if I were to choose, I would pick the ‘Seychelles blue bond’ issued in 2018, since it was the very first blue bond and it paved the way for this new type of debt instrument.”

The Seychelles blue bond was issued in 2016 by the country in partnership with The Nature Conservancy (TNC) to refinance part of its national debt, with terms including marine conservation and climate change adaptation commitments. The move generated up to US$430,000 per year for conservation and adaptation and led to the protection of 86 million acres of ocean – exceeding the goal to protect 30% of Seychelles’ Exclusive Economic Zone and Territorial Sea by 2020.

ICMA’s Blue Bond Guidance notes five blue bond issuances that align with its principles, which include issuances from the Asian Development Bank and the KEXIM Bank.

What are the most important elements of the guidelines?  

It is hoped the Blue Bond Guidance can stimulate growth in debt finance flows through a wider common understanding of how proceeds will be spent and the objectives that will be targeted by issuers.  

Kabbaj says: “The [most important element is the] fact that we now have clarity on eligible projects for blue bonds and that we can clearly map them against specific environmental objectives, such as climate change adaptation and mitigation, conservation, pollution prevention, etc.”  

Utermarck adds that the social angle of blue bonds is also quite an interesting and important one, considering the millions of people around the globe whose livelihoods depend on the blue economy. “This new framework highlighting both environmental and social angles will allow blue bonds to have a more comprehensive sustainability impact.”  

Utermarck also notes that in the guidance blue bonds are viewed as a theme, and align with existing principles such as the Green Bond Principles and the Sustainable Bond Principles. She adds that this is why ICMA partnered with other organisations such as the IFC and UNEP FI, “because they all have their own specific guidance for blue….we combine this so the guidance draws on that”.  

The ICMA guidance builds on existing market standards that underpin the global sustainable bond markets such as the Green Bond Principles and also draws on pre-existing specific blue economy guidance: UNEP FI’s Sustainable Blue Economy Finance Principles and associated Blue Finance Guidance, the UN Global Compact’s Practical Guidance to Issue a Blue Bond and Sustainable Ocean Principles, the Asian Development Bank’s Ocean Finance Framework and Green and Blue Bond Framework, and the IFC’s Guidelines for Blue Finance. 

The organisations have come together to support the development of a sustainable blue economy, which is “integral to tackling the triple planetary crisis of a rapidly changing climate, nature loss and pollution”. The ocean serves as a vital heat and carbon sink, absorbing about 31% of the carbon dioxide emissions released and regulating the global climate.  

The guidance includes a table which lists the 10 eligible project categories from the green bond principles and also the five overarching environmental objectives. “Then it combines that with the blue categories from other guidance and from other partner organisations, to make it clear what can be financed when it comes to the blue or specifically oceans area,” says Utermarck. 

What are the guidelines missing?

“There is nothing really missing….we just need to see the translation of these guidelines into investment opportunities,” says Kabbaj, who has been involved in the structuring of a number of blue bonds.  

“It took 12 years for the green bonds to reach the first trillion dollars (in cumulative terms); I’ll be curious to see how long it will take blue bonds to reach this milestone. Hopefully these new guidelines will help create momentum around this innovative and crucial debt instruments” she says.  

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