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Pouring Money on Troubled Waters

Investment in blue economy is vital for planet’s future, but the breadth of risks to ocean health pose challenges to asset owners.

The ocean economy  is estimated to be worth US$2.5 trillion annually, but just US$13 billion has been invested during the past ten years to support sustainability, according to an international joint academic and public institution report. If further action is not taken to tackle the effects of unsustainable use of oceans and their resources, a total of between US$200 billion-US$1 trillion will be required annually by 2100 to pay for coastal protection, relocation of people and loss of land to sea level rise.

“In the absence of proactive measures to mitigate climate change, the cost of climate impacts on the ocean could be an additional US$322 billion a year by 2050; this cost includes losses in fisheries, tourism, and ocean carbon absorption, damages arising from sea-level rise and storms,” states the report.

Most of the US$13 billion investment made to date has been in the form of philanthropic and public-sector development assistance, with little funding coming from the private sector.

Blue transition

The transition to a sustainable ‘blue economy’ is one of the most pressing challenges – and opportunities – of our time, said Louise Heaps, Head of Sustainable Blue Economy at the World Wildlife Fund (WWF).

Speaking during World Oceans Day at the BMO Responsible Investment Conference 2021, Heaps said life “could not exist without the ocean” and only a healthy ocean can support life. The finance and investment sector has a “pivotal” role to play in creating a resilient ocean economy, she added.

Sustainably managed oceans can generate financial gains. Revenue losses from overfishing total US$83 billion annually, said Heaps, but the marine harvest could be 13% higher than existing levels if managed well. “We need to rebuild our natural assets and urgently align to sustainable blue economy principles,” she said.

Venetia Bell, Head of Strategy and Chief Sustainability Officer at GIB Asset Management, says some of the world’s largest companies have a direct stake in the viability of the ocean as a resource. “There is an opportunity for them to finance themselves in a way that is strongly aligned with ocean preservation,” she says. “Our analysis shows that the aggregate total debt outstanding of the ‘Ocean 100’ amounts to circa US$1.8 trillion. In aggregate, 42% of these companies show improving ESG scores – this suggests a sizeable opportunity for refinancing as sustainability-linked blue debt, tying financing costs to improved sustainability scores. This has the potential to create a virtuous cycle of improvements.”

There was little in the way of guidance on ocean sustainability for investors, until the European Commission, WWF, the World Resources Institute (WRI) and the European Investment Bank (EIB) developed the Sustainable Blue Economy Finance Principles.

The 14 voluntary principles provide a framework for banks, insurers and investors to finance a sustainable blue economy. They promote the implementation of the Sustainable Development Goal (SDG) 14 related to Life Below Water, and set out ocean-specific standards, allowing the financial industry to “mainstream” sustainability of ocean-based sectors.

“The Principles recognise a shift away from viewing ocean protection as a ‘nice to have’ to something that is central to securing national economies and businesses in the long term,” said Heaps.

Guidance for private sector finance

“The Sustainable Blue Economy Finance Principles are very high level and comprehensive,” says Dennis Fritsch, Project Coordinator Sustainable Blue Economy at UNEP FI. “If an institution is thinking of investing when it comes to oceans, the Principles are the place to go.”

In response to requests from financial institutions, UNEP FI recently released new guidance, in the form of a practical toolkit. Outlined in a report, ‘Turning the Tide: How to finance a sustainable ocean recovery’, the toolkit focuses on five ocean sectors, chosen for their established connection with private finance: seafood, shipping, ports, offshore renewables and coastal tourism.

It provides investors and other users with a detailed sectoral breakdown – a “deep dive”, says Fritsch – of which activities to seek out as best practice, which activities to challenge, and which activities to avoid completely due to their damaging nature.

Fritsch likens the toolkit to a ‘cheat sheet’ for investors to evaluate the activities of companies in the ocean economy, providing information on the environmental and social impacts across the sector and how to relate those to risk and materiality considerations. In turn, it should also help companies in the sector to become more attractive to investors by providing information about what they need to do to become sustainable.

In addition to the Principles, work is under way on an EU ‘Blue’ Taxonomy, which would provide more detailed guidance.

These measures, said Heaps, would combine to create guidance on financing ocean sustainability and supporting investment decision making. As a matter of urgency, she added, finance should be redirected to restoring ocean health and to supporting innovation and new practices. “The investment community can be part of the solution because collaboration with all stakeholders in the ocean economy will be really critical. There will be partnering and exchange of data, knowledge and best practices on a scale not seen before.”

The data challenge

Douglas Heske, CEO at US-based manager Newday Impact Investing, says the data set associated with identification of not only ocean health, but also sustainability metrics, continues to be a challenge. “There is no global standard for measurement today and much of the data that is provided is self-reported by companies themselves. Even the sustainability research provided by many of the large data providers is shallow ‘check-the-box’ research. Furthermore, data delivered from one provider to another can be very different.”

Measurement is critical so investors can assess their portfolio alignment, and stress test against ocean scenarios, says Bell. “Net zero-aligned initiatives put data at the centre of their approaches – such as the Poseidon Principles, which aim to drive the assessment and disclosure of climate-aligned ship finance portfolios. But, like with land-based emissions, companies are still struggling to measure impacts accurately and analytical tools remain immature.”

Previously, most funds related to sustainable ocean investing were specific and impact-oriented, but the scope is now broadening with an increasing number of engagement-oriented funds being issued, says Fritsch. There is also interesting work in the insurance sector, he says, including the Ocean Risk and Resilience Action Alliance. This coalition of insurance and finance sectors, governments, non-profits, and stakeholders from the Global South is pioneering finance and insurance products that incentivise investment into nature-based solutions, with a focus on protecting the regions and communities that need it most. Its aim is to drive US$500 million of investment into nature-based solutions by 2030.

“There are multiple benefits to come out of improved ocean health. The bigger and more forward-thinking players are realising this now; it is great to see,” says Fritsch. “It is very important that financial institutions are on board as they provide the capital to power these sectors.”

SDGs a “powerful tool”

Engaging with companies on ocean health is a key area of focus for BMO Global Asset Management (BMO GAM), says Responsible Investment Analyst Emma Lupton. SDGs are a “powerful tool” for company engagement, she says, noting that BMO GAM extends its engagement beyond SDG 14 to other SDGs with “relevance to ocean health”. Of the 169 underlying targets of the SDGs, BMO GAM has identified 50 relevant to its ocean investing team. “This is not a narrow topic; the health of the ocean is vital to many interconnected systems,” she says.

“Our industry can drive positive change by investing in companies creating sustainable solutions for ocean health, such as those that promote the circular economy and a move away from single-use plastic use, waste management or sustainable fishing practices,” says Lupton. “Investors must also engage with companies to adapt their business models to better support the ocean – whether directly or through the adoption of more environmentally or climate-friendly practices.”

Bell notes that analysts PwC recently highlighted that SDG 14 was among the three least cited of all the SDGs in company reports, although sustainable ocean issues do cut across other SDGs, notably SDG 13 Climate Action.

Recent blue economy launches include the DWS Group’s DWS Concept ESG Blue Economy equity fund, which aims to invest in companies that have a positive impact on coastal and marine ecosystems. Paul Buchwitz, Senior Portfolio Manager at DWS, says “the blue economy is expected to grow twice as fast as the established economy by 2030”.

In June, BNP Paribas Asset Management launched the BNP Paribas Ecosystem Restoration, a thematic fund offering exposure to companies engaged in the restoration and preservation of global ecosystems and natural capital. Aquatic ecosystems are one of three main themes for the fund, which includes investments related to water pollution control, water treatment and sustainable packaging, aquaculture, efficient irrigation systems and flood control solutions.

Turning the tide

The UN-supported World Oceans Day on 8 June was marked this year by a declaration of the Decade of Ocean Science for Sustainable Development, which will run until 2030. The aim is to meet the requirements of UN SDG 14, to conserve and sustainably use the oceans, seas and marine resources, by 2030.

BMO GAM’s Lupton says public awareness about the health of the oceans has significantly increased worldwide in the wake of activism and documentaries such as naturalist and broadcaster David Attenborough’s Blue Planet series.

Newday’s Heske says extensive media coverage of destructive corporate practices affecting ocean health means more companies are now keenly aware of their impacts. “Conversely, many investors may not be as familiar with what they can do to help assess the issue. Supporting companies that are responsible stewards of ocean health and sustainability is critical,” he adds.

Bell says solutions are possible across the spectrum of risk, return and impact and hence there is space for philanthropy, blended finance, and impact-led as well as responsible solutions. “However, there are some features of ocean-problems that are particularly well-suited to joint public and private sector action – namely, those with a particular ownership challenge, lack of robust revenue streams, and where there is a need for a just, community-focused transition.  Cooperation and transparency will be vital in securing the future of the blue economy.”

For Fritsch, the speed of change – in terms of investment inflows supporting ocean sustainability – “isn’t as fast as we’d like, but there is great potential for change and everyone knows what needs to be done. It is all about finding the will, including policy commitment.” While UNEP FI members are acting on the issue, he says, it should be remembered that “many financial institutions do not have experts on these topics. Ocean sustainability is a very new topic and we are happy to help financial institutions, but they cannot do it on their own. They need governments to take a stand, particularly on creating protected ocean areas.”

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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