The green bond market’s remarkable success, currently valued at over US $500 billion[i], shows how bond finance is an effective way to raise substantial capital for climate-related investments. Following on this success, blue bonds are emerging as the newest trend in sustainability investing and they’re poised to make waves.
Introduced in 2008, green bonds commit to using the funds they raise exclusively for environmentally friendly projects, assets, or business activities[ii]. Since then, the green bond market has seen explosive growth and helped to shape investor attitudes toward sustainable investing.
The blue bond market — blue as in oceans — is where green bonds were 15 years ago[iii]. Blue bonds are a relatively new type of sustainability designed to finance the conservation and sustainable management of ocean and coastal resources[iv].
The Republic of Seychelles issued the first blue bond in 2018, with funds dedicated to expanding Marine Protected Areas (MPAs) and improving fisheries governance[v]. To date, only 25 other blue bonds have been issued[vi]. Although in its infancy in comparison to green bonds, the blue bond market is poised to follow a similar trajectory as governments, companies, and investors begin to realize the importance of the blue economy and the relationship between climate change and our oceans[vii].
The Ocean’s Big Role
The ocean covers 70% of the Earth’s surface, comprises 97% of all water on earth, and contains 99% of all living space on the planet[viii]. It plays a vital role in absorbing carbon dioxide and producing the oxygen we breathe, it is a significant component of the global economy, and a key element in fighting climate change. However, governments and organizations around the world continue to abuse the ocean rather than protect it. But with over three billion people reliant on a healthy ocean for their livelihoods, and more than 350 million ocean-related jobs, continued exploitation of our oceans will have catastrophic consequences[ix].
Commitments without Capital
The past few years have seen numerous commitments to restoring and protecting the long-term health our oceans. The United Nations declared 2021-2030 as “The Ocean Decade” and the 30×30 campaign pledges to protect at least 30% of the ocean by 2030[x]. Despite these commitments, the ocean remains chronically underfunded. Sustainable Development Goal (SDG) 14 “Life Under Water” receives the least amount of long-term funding of any of the SDGs. Recent reports suggest that $175 billion per year is needed to achieve SDG 14 by 2030; and yet, between 2015 and 2019, just below USD $10 billion was invested.[xi]
Not only does this gap prevent any meaningful progress, the cost of inaction is devastating. Failing to invest in our oceans could result in a total bill of USD $200 billion to $1 trillion a year by 2100 in loss of land, people relocation, and coastal protection[xii]. To put it simply, we cannot afford to underinvest in our oceans.
Mobilizing Capital Through Blue Bonds
Current ocean funding comes primarily through public and philanthropic sources, which are essential, however incredibly insufficient. Enabling the increased use of private finance is critical to achieving ocean conservation goals, and the use of blue bonds can play an essential role.
Bonds are a debt instrument that facilitates an interaction between a borrower and an investor. The investor provides capital to the borrower, and the borrower is required to pay back that capital within a certain period. In the case of blue bonds, the borrower is also required to use the capital to create positive impact on the marine environment. Such an arrangement enables the borrower to access significant amounts of capital upfront and provides the investor with a predictable income stream. This relationship is of particular use within the climate landscape. Green and blue bonds effectively unlock additional sources of capital for climate-related investments and enable private investors to participate in markets that would otherwise be considered too risky.
Successful Green Bonds as a Blueprint
To enable the rapid and responsible scaling of the blue bond market, we can leverage existing frameworks from green bonds as models. The green bond market has seen numerous innovative bond structures that support investment in traditionally underserved markets and align financial incentives with sustainability-focused outcomes. Three of these innovative bond issuances are outlined below and offer unique opportunities to apply similar structures to the blue bond market.
Blue is the New Green: A deep dive into three green bond structures and how they can turn blue
The Wildlife Conservation Bond
In 2022, The World Bank and Global Environment Facility issued a first-of-its-kind Wildlife Conservation Bond (WCB) which channels investment into conservation outcomes. This five-year $150 million bond contributes to protecting and increasing black rhino populations in two protected areas in South Africa[xiii]. The WCB is a great example of an innovative green bond that unlocked new financing streams for biodiversity protection and conservation initiatives.
Using the Wildlife Conservation Bond as a model, we can replicate this template across new geographies and species and transform how conservation is funded. Investors in the WCB do not receive coupon payments. Instead, the issuer makes conservation investment payments to help fund rhino conservation initiatives. In a similar manner, blue bonds can be created that enable coupon payments to be channeled to protect critical marine species.
Uruguay’s Sustainability-Linked Bond
In 2022, Uruguay issued a USD $1.5 billion sustainability-linked bond which includes a pricing feature designed to reward progress made on emissions-reduction targets. Coupon payments received by investors would decrease if the Uruguay government met pre-determined emissions targets, but if targets were missed there was a required increase in payment[xiv]. This arrangement aligned financial and environmental incentives and offered a signal to borrowers that more affordable finance is available in return for performing – or exceeding – sustainability strategies[xv].
Similar financing structures could be applied across a range of sustainability goals within the ocean landscape. Rather than reward progress on emissions reductions, blue bonds could be structured to offer favorable financing for biodiversity, establishing marine protected areas (MPA ) reducing plastic pollution, or fisheries management.
The Forests Bond
The Forests Bond was issued by the International Finance Corporation in 2016 to help unlock private finance for reducing deforestation. Investors in the USD $152 million Forests Bond could choose to receive coupons in the form of verified carbon credits, rather than cash payments[xvi]. This arrangement helped to boost demand for carbon credits and demonstrated investor interest in sustainability-focused investments.
The Forests Bond model can be repeated to support conservation of blue carbon ecosystems such as mangroves, salt marshes, and seagrasses. Blue carbon ecosystems sequester two to four times the amount of carbon of terrestrial forests, however, it is estimated that these ecosystems are being destroyed at four times the rate of tropical forests[xvii]. Designing a bond to act as a catalyst for the blue carbon market could offer the critical incentives needed to protect these essential environments.
Building the Blue Bond Wave
In all three of the above cases, investor demand for the green bond far exceeded initial expectations or the planned bond offering. This indicates that there is high investor interest for innovative bond models that provide both positive financial and climate returns. The main challenge is then providing investors with enough attractive opportunities to participate. With just 25 blue bonds issued to date, the blue bond market is nascent. Establishing a robust blue bond market requires transparency, standardization, and accountability. Clear Key Performance Indicators (KPIs) must be developed to demonstrate the tangible benefits of blue bond investments in terms of ocean conservation and sustainable resource management. Additionally, collaboration between governments, financial institutions, and environmental organizations is essential to create a supportive ecosystem that encourages blue bond issuance. Ultimately, the future of the blue bond market hinges on aligning financial incentives with environmental objectives, fostering innovation, and building a robust infrastructure that inspires trust and commitment from a diverse set of stakeholders[xviii].
Guest Post by Mackenzie Audino, 2024 Masters candidate in business administration and environmental management. This project was completed as part of the ClimateCap Fellowship, a program of the ClimateCap Initiative led by Duke University’s Fuqua School of Business and supported by the Hearst Foundations.
[xviii] OpenAI. “The future of the blue bond market and what needs to happen to increase the amount of capital that is invested.” ChatGPT, 2023, [https://chat.openai.com/c/ba58a2d7-1129-465c-9fa5-f4815f08aa91]. Accessed [September 27, 2023]