Capital Market Breakthrough: The Stir caused by Blue Bonds
The blue bond market, a niche within the broader environmental and green bond market, has been growing steadily since its inception around 2018. While specific issuance data for blue bonds in the latest reports is not directly highlighted, thematic and labelled environmental bonds such as green bonds have expanded robustly, reaching USD 670.9 billion in 2024.
Blue bonds, which finance ocean-related and marine environmental projects, are increasingly seen as a way to address the underfunding of Sustainable Development Goal (SDG) 14 (life below water). The United Nations recommends that issuers take three key steps to issue a blue bond: aligning with global standards, developing a framework with clear targets and sustainability performance metrics, and setting key performance indicators (KPIs) that are measurable and auditable.
Notable blue bond issuers in the past have included countries like Seychelles, Belize, and more recently Côte d'Ivoire and Indonesia. These nations have financed sustainable fisheries, marine protected areas, and ocean conservation projects with blue bonds. As the momentum for sustainable finance continues to grow, it is expected that emerging economies with significant marine resources will continue to issue blue bonds.
One innovative financial instrument used in blue bond issuance is debt-for-nature swaps. In these swaps, external debt is forgiven or reduced in exchange for local environmental conservation measures. Debt-for-nature swaps have been utilized by several countries, including Seychelles, Indonesia, Colombia, Gabon, Belize, and Barbados.
Investors in blue bonds generally include high-net-worth individuals, venture capital firms, and investment banks. For a bond to be labeled "blue", the project that is funded must be consistent with the project categories of the International Capital Markets Association’s (ICMA) Green Bond Principles (the GBPs).
The ICMA provides guidance on launching a blue bond, which extends its pre-existing global market standards in respect of ESG instruments. Best practice for issuing blue bonds suggests that an issuer should obtain a second party opinion in respect of its framework.
According to the International Finance Corporation, there has been a significant increase in the momentum of blue bond issuances since the first blue bond was issued in 2018. The blue economy is expected to double in size to U.S.$3 trillion by 2030, creating 40 million jobs, making it the eighth largest economy in the world, with an asset value estimated at US$24 trillion.
In return for providing debt relief, the government agrees to set aside a portion of the debt savings for marine conservation efforts. Blue bonds 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, sustainable maritime transport, and port infrastructure projects that prevent marine pollution.
Blue bonds are considered a sub-type of green or ESG bonds. The general process for debt-for-nature swaps involves sovereign debt being raised by the government, used to refinance and restructure debt, and creditors holding the newly issued sovereign blue bonds in place of their previously held sovereign debt. Debt-for-nature swap structures are more complex and expensive to implement compared to the traditional use-of-proceeds blue bond structure.
As the blue bond market continues to grow and evolve, it offers a promising avenue for funding ocean-related projects and contributing to the achievement of SDG 14. With increasing investor interest and the development of best practices, we can expect to see more blue bond issuances in the future.
- The blue bond market, which focuses on ocean-related and marine environmental projects, is predicted to expand further as emerging economies with significant marine resources issue more of these sustainable financial instruments.
- In the process of issuing a blue bond, it's recommended that global standards are adhered to, a clear framework with sustainability performance metrics is developed, and key performance indicators (KPIs) are set to ensure measurable and auditable progress.
- Businesses, high-net-worth individuals, venture capital firms, and investment banks have shown interest in investing in blue bonds, which are considered a sub-type of green or ESG bonds, as they fund various projects aimed at preserving the blue environment, such as sustainable fisheries, marine protected areas, and coastal ecotourism.
