Charting Sustainable Seas: Blue Bonds in the Pacific
Key Points
Blue bonds are an emerging financing mechanism that raises capital for projects focused on marine conservation and the sustainable management of the ocean and its resources.
Blue bonds are issued and work in the same way as traditional bonds.
Blue bonds can provide a range of benefits to Pacific Island nations, enabling them to protect their marine resources, stimulate economic growth, attract private investment, build resilience to climate change and engage in sustainable practices for the benefit of the community and the environment.
What is a Blue Bond?
Blue bonds are a debt financing instrument usually issued by governments, development banks and companies. They are similar to green bonds in that they enable capital-raising and investment for projects that have environmental benefits. However, the difference is that blue bonds are used specifically for projects related to the health of oceans and marine and coastal conservation and are focused on creating positive environmental, economic and climate benefits in line with the Sustainable Development Goals 6 and 14 issued by the United Nations.[1] This includes marine ecosystem management and restoration, sustainable fisheries and aquaculture, reducing coastal pollution, developing coastal infrastructure resilient to climate change, or supporting research and development for ocean-related innovations.[2]
There are currently no formal guidelines in place in relation to blue bonds. Blue bond issuances must therefore align with the Green Bond Principles (GBP) issued by the International Capital Market Association (ICMA) which promote best practice in the issuance of green bonds.
The first blue bond was launched by the Republic of Seychelles in October 2018. Since then, blue bonds have become increasingly more prevalent amongst investors who have started to see the economic and social benefits that arise from greater investment in sustainable oceans. This is reflected by the fact that between 2018 and 2022 a total of 26 blue bonds were issued internationally.[3]
How does a Blue Bond work?
Blue bonds work in the same way as traditional bonds.
Issuance – a government, development bank or company issues the bond to raise capital for projects aimed at marine and ocean-related projects. The bonds can be denominated in the local currency or a major international currency, depending on the issuer’s preference and market demand.
Investor Appeal – investors who are interested in and committed to both financial returns and environmental sustainability then purchase these bonds, providing the issuer with funds for the project.
Monitoring and Reporting – the issuer is responsible for monitoring the progress and impact of the financed projects and providing regular reporting to bondholders and the public on how the bond proceeds are being used.
Repayment – like any other bond, blue bonds come with a repayment obligation. They have a predetermined maturity date when the principal amount must be repaid to the investor. Repayment of the principal is usually funded from the revenue generated by the project or, in some cases, from the general revenues of the issuing entity. Blue bonds also typically pay periodic interest to the investor.
What do Blue Bonds mean for the Pacific?
Blue bonds are a powerful tool for Pacific nations to harness for the following reasons:
The ocean is central to Pacific nations and their way of life, culture, food, livelihoods and national economies. Having debt financial instruments that are specifically geared towards attracting and incentivising investments in sectors and economic activities that promote a sustainable marine environment and protect vital ocean resources ensures that the ocean can continue to play a central role to Pacific nations and the businesses and individuals living there.
With the Pacific region being highly vulnerable to climate change and increasingly regular and severe weather-related disasters, blue bonds offer an innovative and useful mechanism to increase Pacific nations’ resilience to these challenges.[4] Although blue bonds alone are not enough, they are important in filling the funding gaps for a sustainable blue economy left by other financing instruments.[5]
Pacific nations will have the opportunity to contribute to the strength of the blue economy and make a meaningful impact. Blue economy is defined by the World Bank to be the “sustainable use of ocean resources for economic growth, improve livelihoods, and jobs while preserving the health of ocean ecosystem”.[6]
It will generate jobs in marine-related industries and stimulate economic growth within the region.[7] Blue bonds are usually structured as long-term investments, therefore providing a stable source of funding to conservation and sustainability projects in the region.
Blue bonds often involve cooperation between Pacific Island nations and international organisations, therefore fostering collaboration and knowledge-sharing in the region and building public-private sector partnerships.[8] This can lead to the development of best practices for ocean management and conservation.
Issuing blue bonds can encourage governments and institutions of Pacific Island nations to improve their governance and management of marine resources, as they often require transparency, accountability and adherence to sustainable practices as conditions for borrowing.[9]
Blue bonds are just one of many other “thematic” bond types that have gained traction. Governments and companies are also issuing green bonds, sustainability bonds and social bonds to address financial inclusion, social inclusion, health, education and gender equality. The rise in these different bond types indicates the growth in demand amongst investors for financing instruments that not only effectively raise capital but also create meaningful and positive change.
Currently, blue bonds represent less than 0.5% of the sustainable debt market so there is a significant and exciting opportunity for countries in the Pacific, who are heavily reliant on oceans and its resources, to capitalise on this emerging form of debt financing, become a key player in the market and strengthen commitment to the blue economy.[10]
If you require more information about blue bonds or bonds in general or advice around the applicable laws and regulations governing bonds in any Pacific jurisdiction please do not hesitate to contact us.
[1] World Bank, “Sovereign Blue Bond Issuance: Frequently Asked Questions”, Available online: https://www.worldbank.org/en/news/feature/2018/10/29/sovereign-blue-bond-issuance-frequently-asked-questions (accessed on 11 September 2023); UNDP, “Demystifying Green and Blue Bonds for the Pacific Region” (July 2022), p. 24. [2] Asian Development Bank, “ADB Issues First Blue Bond for Ocean Investments (10 September 2021), Available online: https://www.adb.org/news/adb-issues-first-blue-bond-ocean-investments (accessed on 11 September 2023). [3] Bosmans, Pieter and Frederic de Mariz. 2023. "The Blue Bond Market: A Catalyst for Ocean and Water Financing" Journal of Risk and Financial Management 16(3): 184. [4] UNDP, “Demystifying Green and Blue Bonds for the Pacific Region” (July 2022), p. 45. [5] Bosmans, Pieter and Frederic de Mariz. 2023. "The Blue Bond Market: A Catalyst for Ocean and Water Financing" Journal of Risk and Financial Management 16(3): 184. [6] UNDP, “Demystifying Green and Blue Bonds for the Pacific Region” (July 2022), p. 25; World Bank, “What is the Blue Economy? Available online: https://www.worldbank.org/en/news/infographic/2017/06/06/blue-economy (accessed on 11 September 2023). [7] UNDP, “Demystifying Green and Blue Bonds for the Pacific Region” (July 2022), p. 25. [8] Ibid. [9] Asian Development Bank, “Sovereign Blue Bonds: Quick Start Guide”, Available online: https://www.adb.org/sites/default/files/publication/731026/adb-sovereign-blue-bonds-start-guide.pdf (accessed on 11 September 2023). [10] Bosmans, Pieter and Frederic de Mariz. 2023. "The Blue Bond Market: A Catalyst for Ocean and Water Financing" Journal of Risk and Financial Management 16(3): 184.
