Blue Finance: a Deeper Shade of Green - BNP Paribas CIB
Friday 20 April 2018

Demand for green bonds has risen over the past few years and there is now appetite to widen the scope to include the so-called "blue economy".

Transforming the economy from one based largely on the exploitation of finite resources, into a sustainable one based on renewable sources, will require significant investment and a consorted effort to bring 'green' into the heart of the collective psyche.

The Global Commission on the Economy and Climate (GCEC) estimates that global infrastructure investment requirements over the next 15 years amount up to USD 90 trillion. "These demands are driven by ageing infrastructure in advanced economies and higher growth and structural change in emerging market and developing countries, especially rapid urbanization." 1

Initial efforts and focus have so far largely been placed on fighting carbon emissions and promoting projects aimed at the transformation of the productive economy toward a lower utilization of fossil fuels. In that respect, the reduction of carbon emissions was – and still is – a key priority in the path to sustainability.

However, climate change cannot be addressed solely by reducing emissions. Tackling the challenges of climate change will also require enhancement of existing carbon storage facilities, most of which are being provided by oceans, which are also at the heart of the global trade economy for goods transportation.

The significant increase in discussion about the ongoing pollution of the oceans – plastic waste dumped in the oceans and the need for sustainable fishing quotas in the EU – are examples of the growing awareness about the need to preserve and clean oceans, as much as the rest of the environment.

Global value added in the ocean economy in 2030 is estimated to grow to more than $3 trillion [from $1.5 trillion in 2010; in 2010 USD]

The Ocean Economy in 2030, OECD

The rising tide of sustainable investing

In the fight against climate change, changing attitudes and regulations, alongside enhanced access to information, has helped Green Finance to flourish. Green Finance options – such as green and sustainable bonds, as well as green loans and financing of renewable projects, has provided investors with the tools to make a positive impact through their investments. International support from governments and institutional players has also been instrumental. For example, in December 2015, the United Nations (UN) codified its global Sustainable Development Goals (SDGs) which set out specific targets for the next 15 years. Individual governments too are moving forward with their own sustainable agendas, while trade associations, such as the International Capital Market Association, are issuing guidelines and best practices to support Green Finance and green products more generally in a consistent way.
The field of Green Finance has evolved, mainly over the past 10 years, becoming increasingly sophisticated and reliable, expanding its horizon and its universe, as well as its taxonomy and identity, through the adoption of standardized norms like the Green Bonds Principles and the Green Loan Principles. This has created better incentives for companies to attract dedicated pools of previously untapped financing, and for investors to act responsibly by promoting projects that align with their Environmental Social and Corporate Governance objectives.

"90% of fish stocks are overfished or fished at their biological limit, affecting the economies of Small Island Developing States (SIDS) which already suffer from the adverse effects of climate change. In addition, coral reefs and mangroves are under threat from pollution, bleaching, and coastal development, reducing protection against severe weather."
Source: The Nature Conservancy
It has been a logical next step to apply the lessons learned in green finance to "blue" – and to use similar mechanisms to encourage investment and to develop project finance targeted at preserving and protecting our oceans. The European Commission, WWF, the Prince of Wales's International Sustainability Unit and the European Investment Bank (EIB) unveiled 14 Blue Finance Principles in March 2018. These principles are designed to support the ocean's health by leveraging financial tools and dedicated investment focused on ocean-friendly projects. If widely adopted, the Sustainable Blue Finance Principles may help transform the way society manages ocean resources, while also demonstrating, once again, that investors' hunt for yield can go hand-in-hand with environmental and social stewardship.

Whetting the market's appetite

In February 2018, The Nature Conservancy (TNC), an American NGO focusing on preserving the environment, issued dedicated bonds to help restructure and refinance Seychelles' sovereign debt due to the Paris Club in exchange for stronger commitments and concrete actions on the preservation of marine zone.

Leveraging Seychelles' need to refinance its historical indebtedness, TNC worked tirelessly with its debtors, Seychelles, local constituents and international organizations like the World Bank to set up the restructuring and refinancing of the sovereign debt. This restructuring would entail not just another extension on purely financial terms, but an amendment at better conditions, and a grant from donors to pay off part of the debt to fund specific local commitments to preserve the environment and the marine zones on the archipelago.

This transaction helped the country alleviate its debt load while making sure its unique ecological biosphere will be preserved for the years to come. It is a model which could be used for similar projects in other countries facing similar challenges.

More generally, this project also highlighted the appetite for such types of projects. Specific dedicated funds are being set up to invest solely in the Blue Economy and Blue Finance investments. For example, the alternative asset manager Althelia is raising a dedicated "Blue" fund, targeting a total size of EUR200m AUM, and has already received the support of institutional investors including the EIB.

Blue Bonds - What and why?
- Investment-grade fixed income product

- Aggregates debt restructuring across multiple small island developing states

- Follows a standardized set of conservation and financial outcomes (which allow tailoring to local conditions) opportunity to develop the "Blue Bond Principles"

- Lower cost way to raise impact capital for debt restructuring at a larger scale

- Provides flexibility and speed to market as countries and creditors agree on terms

- Can go beyond limits of development finance institutions (e.g. the countries they can lend to)

- Creates an incentive for countries and creditors to capitalize on refinancing window Diversifies risk with multiple countries (sovereign risk) and geographies (catastrophic risk)
Figure 1: Blue Bonds for small island developing States (SIDS) - What and Why?
Source The Nature Conservancy

Many small streams make one big river

While still in its infancy, the Blue Economy is fast becoming a reality for investors, institutions and citizens alike. Early successes like the Seychelles' debt restructuring demonstrate investors' appetite as well as the need for such projects to be financed and supported broadly by the finance community.

The 14 Blue Finance Principles that have already been unveiled are a welcome step in the codification of these instruments. Such support from political and non-governmental bodies alike shall serve as catalyst for further development. Blue Finance will certainly take its place alongside Green Finance, and will undoubtedly follow the steps of its elder sibling in its organization and codification from the industry's bodies.


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