In the vast expanse of financial instruments dedicated to sustainability, blue bonds are akin to the uncharted waters of the high seas - waiting to be fully explored and harnessed. Sustainable blue economy - a term now deeply ingrained in our lexicon - is not merely an economic metric, but the lifeblood of our planet, contributing an estimated $2.3 trillion per year to (market) goods and services.¹  Yet, in our analysis, we have uncovered a startling gap: Blue bonds currently account for a mere 0.5% of the global sustainable debt market. This is particularly concerning given the estimated $150 billion annual deficit in ocean conservation financing² - a gap that blue bonds are perfectly poised to fill. So, why aren't we casting wider nets?

Investor challenges

A critical observation from our vantage point is the absence of standardized benchmarks for blue bonds. While it mirrors the early challenges faced by green bonds and other sustainability bonds in terms of standardization and verification, blue bonds must chart their own course through these uncharted waters. The lack of standardized benchmarks for blue bonds results in subjective interpretations of environmental credibility and raises concerns about 'blue-washing', akin to 'green-washing' in the green bond sector. This phenomenon poses a challenge for investors in distinguishing genuine conservation efforts from those making superficial claims of sustainability.

At the 2022 UN Ocean Conference in Lisbon, a working group of five international organisations committed to launching global guidance on blue bonds. Earlier this year, IFC, ADB, UNEP FI, UN Global Compact and ICMA developed a comprehensive global practitioner's guidance on blue bonds to build investor confidence and catalyse investments that protect our oceans and the marine ecosystem, in line with SDG 14.³

Foggy disclosures

From our observations, the blue bond market often presents a fog of uncertainty. Investors may find themselves adrift with limited disclosure - navigating with a promise of impact but without the detailed compass of how these funds will be deployed. Furthermore, the rarity of project-specific reporting hinders the ability to track the journey of investments from issuance to impact.

Marine knowledge

While investors may not typically possess in-depth knowledge of marine science, it remains crucial for assessing the viability and potential impact of marine-related projects. From the complexities of mariculture to the dynamics of coastal ecosystems, each investment requires a specialized understanding to ensure its success in the long term.

Policy tides

The regulatory landscape for marine conservation is as unpredictable as the seas themselves, with potential policy shifts capable of swiftly altering the terrain. Investments in sustainable fisheries, for example, must be robust enough to withstand the ebb and flow of international fishing agreements and regulatory shifts.

Impact measurement

In our opinion, quantifying the impact of blue-bond initiatives is among the most nuanced aspects of oceanic investment. The interdependency of marine ecosystems implies that a single intervention can trigger ripple effects, underscoring the need for a holistic approach to measuring ecological outcomes. For example, a bond funding the protection of a keystone species must consider the cascading effects on the ecosystem, which are often complex and interdependent, rendering simple metrics insufficient to capture the bond's true impact.

Evaluating the depth of blue bonds

Investing in blue bonds requires a comprehensive approach to due diligence that acknowledges the unique challenges of the blue economy.

Sustainability strategies

A comprehensive assessment begins with unravelling the issuer's overarching sustainability strategy. A thorough evaluation of the issuer's environmental, social and governance (ESG) practices is crucial to determining the credibility of a blue bond.

• Environmental integrity: Ensuring issuers have robust measures in place to manage material environmental risks. This includes examining the issuer's track record and commitment to environmental sustainability.
  
  • The presence of short-, medium- and long-term targets for climate transition is imperative. The absence of such targets may indicate a lack of alignment with broader environmental goals
    
• Social responsibility: Evaluating the issuer's impact on local communities and its involvement in projects can be a key indicator of its social responsibility.
  
• Governance excellence: Good governance is aligned with best practices and is essential for ensuring transparency and accountability. A strong governance structure implies a commitment to ethical practices and long-term sustainability.

Assessment of the issue

• Alignment with IFC's guidelines for blue finance
  
  A bond should be assessed for compliance with the International Finance Corporation's (IFC) guidelines for blue finance. This involves verifying the bond’s contribution to Sustainable Development Goals 6 and 14, ensuring funded projects do not significantly harm other SDGs, and upholding minimum ESG standards in line with the Sustainable Ocean Principles.
  
  The process entails examining whether the use of proceeds is directed towards initiatives such as the development of eco-friendly vessels, reduction of carbon emissions through low-carbon fuels, adoption of energy efficiency measures such as EEDI and EEOI, and installation of ballast water treatment systems to protect marine ecosystems. Additionally, efforts to reduce plastic waste and prevent oil spills should be made, all while maintaining a rigorous approach to ESG factors to support sustainable ocean resources.
  
  
• Alignment with ICMA Green Bond Principles (GBP)
  
  For a comprehensive evaluation of a blue bond's adherence to the International Capital Market Association's (ICMA) Green Bond Principles (GBP), investors must scrutinize the following four key components:
  
  
  • Use of proceeds: The proceeds should be seen to directly fund clean transportation projects, aid in pollution prevention by mitigating carbon emissions, and fulfil the goals set by the ICMA's GBP.
    
  • Project evaluation and selection: The bond's framework should ensure projects fit within the eligible green project categories, with a thorough environmental and social evaluation conducted over the lifecycle of the projects. Such evaluations must be documented to manage potential risks and avoid environmental damage, demonstrating alignment with the ICMA's GBP.
  • Management of proceeds: Transparency in managing proceeds is vital, and it should be evident through the Treasury Department's tracking mechanisms. External assurances should guarantee proper use after the allocation of proceeds. Any lack of transparency regarding unallocated funds may compromise alignment.
  • Reporting: The issuer's commitment to regular and detailed reporting on the allocation of proceeds and any significant developments is essential. Annual reports that list funded projects, along with descriptions, allocated amounts and anticipated impacts, will indicate alignment with the ICMA's GBP.

Gabon’s $500 million ‘blue bond’ issuance in 2023 to refinance existing debt was criticised because only a part of the proceeds was ringfenced for marine conservation. The presentation of this deal is also misleading: The debt swap in Gabon did not prompt the Government of Gabon to commit to protecting 30% of its oceans, nor did it generate US$163 million in additional money for ocean conservation.⁴

Charting a sustainable future for our oceans

Blue bonds emerge as promising yet underutilized instruments in the quest for ocean conservation, with the potential to bridge the significant funding gap in marine sustainability. Despite the challenges around standardization, disclosure, marine knowledge, policy shifts and impact assessment, blue bonds offer a promising path forward. Moreover, investors can effectively navigate these challenges by rigorously assessing issuers' sustainability strategies and ensuring alignment with established principles and guidelines. With greater transparency, governance and accountability, blue bonds can play a pivotal role in safeguarding our oceans for future generations, proving that the financial world can indeed align with the tide of environmental responsibility.

¹ Ocean Promise, UNDP

² Your Guide to Green Bonds, Blue Bonds, and Beyond, CFA Institute

³ Blue Finance, IFC

⁴ The implications for ocean governance, CFFA