Capital Market Innovations: The Impactful Debut of Blue Bonds
Blue bonds, a novel financial instrument, are gaining traction as an effective means for issuers and investors to contribute towards addressing climate change, particularly in the realm of ocean and water resource management. Although the United Nations (UN) does not issue a standardised set of guidelines for blue bond issuance, these financial tools generally adhere to principles aligned with broader green and sustainable bond frameworks endorsed by UN-related and international organisations.
The UN's key guidelines for blue bond issuance are rooted in various frameworks and initiatives. Blue bonds are designed to support projects that sustainably manage ocean and water resources, primarily falling under categories such as water production, wastewater treatment, and ocean ecosystem conservation. Issuers typically align their frameworks with widely recognised standards like the Green Bond Principles (GBP) 2021 and the Green Loan Principles (GLP) 2023. For blue bonds specifically, issuers also align with the International Finance Corporation (IFC) Guidelines for Blue Finance.
The UN encourages building capacity among governments and regulators to develop and issue green, blue, and sustainable bonds to support climate action and sustainable development goals. This includes fostering financial market infrastructure and governance to ensure transparency and accountability of such bonds.
Several UN initiatives and resolutions emphasise the importance of sustainable ocean management and climate agreements, such as the Paris Agreement, as foundational to blue bond issuance. These guidelines underscore the necessity to limit temperature rise and protect ocean health, which blue bond projects must contribute to.
Practical models, like Gabon’s and Seychelles’ sovereign blue bonds, demonstrate how countries can incorporate blue bonds into their strategies for sustainable marine economy development. These projects often receive technical support from UN bodies.
Key elements derived from UN-endorsed frameworks and initiatives include aligning with green/sustainable standards, using proceeds for marine and aquatic ecosystem sustainability, demonstrating measurable environmental and social impacts, ensuring robust governance and transparency, emphasising capacity building and reporting, and promoting accountability.
Blue bonds are seen as an innovative method of financing projects that provide economic, social, and environmental benefits to all stakeholders. Since the first blue bond was issued in 2018, there has been a significant increase in the momentum of blue bond issuances. The blue economy is expected to double in size to U.S.$3 trillion by 2030, creating 40 million jobs and becoming the eighth largest economy in the world, with an asset value estimated at US$24 trillion.
Blue bonds are typically used for large-scale infrastructure projects related to maritime transportation, marine renewable energy, coastal ecotourism, sustainable energy, sustainable marine fisheries management, sustainable aquaculture operations, seafood supply chain sustainability, clean water and waste water management, and port infrastructure. They are seen as a way of addressing the lack of funding for SDG 14 (life below water) and are increasingly viewed as a means of financing sustainable solutions within the marine industry.
Sources for this information include T. Rowe Price, ICMA, UN Global Compact, World Economic Forum, and International Finance Corporation. Blue bonds can also be issued in a debt-for-nature swap structure, which involves debt being raised by a government to refinance and restructure existing debt, with the new bonds being held by creditors in exchange for debt relief. The government then agrees to set aside a portion of the debt savings for marine conservation efforts.
References:
- International Finance Corporation (IFC)
- United Nations Global Compact
- World Economic Forum
- ICMA
- T. Rowe Price
Investors can contribute to addressing climate change and sustainable ocean management by investing in blue bonds, which are being used to fund large-scale infrastructure projects in the marine industry. These financial tools generally adhere to principles aligned with green and sustainable bond frameworks endorsed by UN-related and international organizations such as the Green Bond Principles (GBP) 2021 and the Green Loan Principles (GLP) 2023, as well as the International Finance Corporation (IFC) Guidelines for Blue Finance.
