Capital Markets Stirred: The Impact of Blue Bonds Arrival in the Financial Sphere
The world is witnessing a significant shift towards sustainable finance, and one of the most promising innovations in this space is the emergence of blue bonds. These financial instruments are specifically designed to fund marine and ocean-based projects, playing a crucial role in the growth of the blue economy.
According to the United Nations, the blue economy is expected to double in size to U.S.$3 trillion by 2030, creating 40 million jobs and making it the eighth largest economy in the world, with an asset value estimated at US$24 trillion. To harness this potential, issuers are recommended to take three key steps: aligning with global standards and blue bond-specific guidance, developing a framework with clear targets and sustainability performance metrics, and setting key performance indicators (KPIs) that are measurable and auditable.
A Blue Bond is a use-of-proceeds bond that finances marine and ocean-based projects. For a bond to be labelled "blue", the project that is funded should be consistent with the project categories of the International Capital Markets Association's (ICMA) Green Bond Principles (the GBPs). The GBPs recognize blue bonds, stating that green bonds that finance 100% of "blue projects" can be labelled as a "blue bond" by an issuer.
The issuance of a blue bond involves several steps:
- Define the use of proceeds: Clearly specify that the funds will support marine and ocean-related projects such as ocean conservation, sustainable fisheries, coastal ecosystem protection, climate-resilient infrastructure, or marine biodiversity conservation. Transparency on eligibility criteria is essential.
- Engage relevant stakeholders and technical partners: Collaborate with institutions like the United Nations Development Programme (UNDP), which often acts as a technical coordinator, as well as development banks and reputable arrangers to ensure alignment with environmental and social objectives.
- Structure and arrange the bond: Work with financial institutions experienced in sustainable finance to design the bond terms consistent with investor expectations and regulatory frameworks. This includes setting a clear impact framework, reporting standards, and alignment with sustainable finance principles such as those of the ICMA.
- Obtain approvals and certifications: Follow national debt issuance regulations and potentially seek third-party verification or certification to enhance credibility. This can involve aligning with blue bond principles or similar established frameworks.
- Issue the bond transparently: Publish an issuance prospectus detailing the bond’s purpose, use of proceeds, expected impacts, and governance mechanisms. The process can be via public offering or private placement, depending on market and regulatory context.
- Manage and report on the use of proceeds: Implement a transparent and robust monitoring and reporting mechanism on the environmental impact and financial performance of the projects funded, in accordance with UN recommendations and global best practices. Regular reporting builds investor confidence and supports market development.
Examples from recent transactions include the Development Bank of Latin America (CAF) issuing a €100 million blue bond for ocean conservation and climate-resilient coastal infrastructure, and the Central American Bank for Economic Integration (CABEI) issuing a private placement blue bond in Europe, showcasing private investor engagement aligned with sustainable objectives.
Blue bonds are increasingly seen as a way of addressing the underfunding of SDG 14 (life below water). They can be used to finance various projects related to the blue environment, including coastal ecotourism, sustainable energy, marine fisheries management, clean water and waste water management, and port infrastructure. Blue bonds can be considered a sub-type of green or ESG bonds.
Blue bond issuers can be sovereign entities, financial institutions, multilateral development banks, corporations, and municipalities. Investors in blue bonds generally include high-net-worth individuals, venture capital firms, and investment banks. Debt-for-nature swaps are a potential format for sovereign blue bond issuance, where a developing country's external debt is forgiven or reduced in exchange for local environmental conservation measures.
As the blue economy continues to grow, the demand for blue bonds is expected to increase. The International Finance Corporation predicts that the blue economy will continue to grow, creating opportunities for blue bond issuances. Blue bonds are viewed as an innovative method of financing projects that provides economic, social, and environmental benefits to all stakeholders.
- To capitalize on the growing blue economy and contribute to sustainable finance, issuers can opt for blue bonds, a type of use-of-proceeds bond specifically designed for marine and ocean-based projects.
- For high-net-worth individuals, venture capital firms, and investment banks interested in financing initiatives aligned with sustainable development goals, investing in blue bonds presents an opportunity to support projects related to the blue environment, such as coastal ecotourism and marine fisheries management.
