Blue bonds for marine conservation and a sustainable ocean economy: Status, trends, and insights from green bonds

Abstract

Amid funding shortfalls to address ongoing ocean degradation, blue bonds are being designed to finance sustainable development and conservation projects in ocean and coastal areas via private sector investment. Blue bonds seek to deliver both positive environmental and/or social impact alongside a financial return on investment to investors. However, there has been limited academic scrutiny of these early initiatives to evaluate whether this rhetoric is justified. This article leverages 15-years of scholarship on green bonds to develop an analytical framework that is applied to five of the world’s first blue bonds. A comprehensive content analysis of sources such as blue bond project documents and secondary interviews is used to synthesise their characteristics, and consider trends related to their thematic scope, geographical scope, environmental impacts, and financial returns. Thematically, blue bond proceeds are channelled towards projects aligned with Sustainable Development Goal (SDG) 14 ‘Life Below Water’, the Blue Economy, and policy discourse around the ‘blue recovery’ from covid-19. These projects range from marine protected area (MPA) creation, to improved fisheries management, and potentially, oil and gas exploration. However, greater explanation of the logic through which project activities are expected to deliver impact and returns is warranted. Equally, impact measurement is often underwhelming, with many bonds targeting easy-to-measure outputs (e.g., area conserved) rather than outcomes and impacts (e.g., increases in fish abundance). While an alluring and useful financial innovation, greater disclosure on the individual projects and enterprises that blue bonds finance is necessary to validate their sustainability credentials and inform investor decision making.

Introduction

Effectively addressing ongoing ocean degradation is expected to cost approximately US$174 billion per year [1]. However, inadequate amounts of financial capital are hindering efforts to transition towards a sustainable ocean economy and effectively implement Sustainable Development Goal (SDG) 14 ‘Life Below Water’, including the conservation of marine biodiversity [2], [3]. Bos et al. [4] notes that a “diversified portfolio of finance mechanisms is needed to support ocean governance”, with observers advising that private investment is essential yet limited [5]. Amid a broader shift towards sustainable finance, Cooper & Trémolet [6] suggest that around 40% of sustainable investors anticipate financing projects that seek to create positive impact for oceans in the future. This article scrutinises a relatively new private finance mechanism for promoting marine conservation and a sustainable ocean economy: the blue bond.

A blue bond is defined as a “debt instrument issued by governments, development banks, or others to raise funds from investors to finance marine and ocean-based projects that have positive environmental, economic, and climate benefits” [7]. Some of the world’s largest institutional investors, corporate foundations, and conservation organisations are using blue bonds to bolster funding for ocean-related projects [5]. The increased novelty and sustainability credentials that blue bonds can add to an investment portfolio has spurred considerable hype and optimism. Yet, while investor confidence is high, it remains unclear (i) what type of projects blue bonds should be and are financing; (ii) where blue bonds are being used and how equitably decisions over their usage are being made; and (iii) whether the projects they enable can deliver the sought positive environmental and/or social impacts and financial returns, in tandem [2], [8], [9], [10], [11]. These questions are interrelated and urgent; for example, most investors seek investments with low financial risk [12], meaning blue bonds could be increasingly issued for potentially more profitable yet contentious ocean-based development projects such as offshore energy and oil and gas extraction, where net positive impacts for the marine environment are difficult to foresee [13], [14]. Hence, critical academic scrutiny of blue bonds is required to ensure they are financially viable, socially equitable, and environmentally effective.

Blue bonds have only received cursory mention in the academic literature to date [1], [3], [15], [16], [17]. In a guide for practitioners, Roth et al. [18] describe the current state of the blue bond market as a whole, and identify opportunities to help it to scale. These authors along with Mathew & Robertson [11] discuss the need to align blue bonds with globally recognized standards and principles. Such principles are prescribed and overseen by regulatory bodies and financial associations. They include the 14 Sustainable Blue Economy Finance Principles [19], the nine Sustainable Ocean Principles [20], and the four Green Bond Principles offered by the International Capital Markets Association [21]. The latter’s principles are ‘Use of proceeds’ (appropriately describing what project(s) the proceeds will be used for), ‘Process for Project Evaluation and Selection’ (ensuring these project types are eligible to be considered as green or sustainable), ‘Management of Proceeds’, and ‘Reporting’ (of expected or achieved impact). In terms of specific blue bonds, Fitzgerald et al. [22] provide a few paragraphs overviewing the Seychelles Blue Bond,¹ while others cover this and the Nordic-Baltic Blue Bond [2], [10]. However, these accounts are entirely descriptive and, critically, they do not scrutinise the sustainability credentials of the specific projects that these blue bonds finance, nor their anticipated environmental impacts and financial returns that investors are expected to receive. Despite their infancy, Thompson & Bladon [9] call for greater scrutiny of the projects that blue bonds finance to inform investor decision-making, while Mallin et al. [23] assert it would be a “critical error” for scholars not to give a priori attention to the rationales of such projects. The importance of this project-level scrutiny has also been demonstrated for green bonds that focus on biodiversity conservation [24].

Blue bonds leverage upon the success of the green bond market that emerged in 2008 and is now worth over US$ 500 billion [25], [26]. Green bonds finance environmental project in terrestrial settings including many that seek to address climate change mitigation, such as renewable energy, waste management, and low-carbon transport [25], [26]. Considerable research has informed academic debates regarding the integrity of green bonds concerning their (1) thematic scope in terms of the greenness of the projects that their proceeds finance [27], [28]; (2) geographical scope in terms of distributive equity, collaboration, and coordination [29], [30], [31]; (3) environmental performance [26], [32]; and (4) financial performance [12], [32], [33], [34]. Thus, key insights can be gained from our 15-years of research and experience with green bonds, which can be applied to inform and shape the development of blue bonds.

This article aims to scrutinise trends and challenges evident in the projects financed by blue bonds. While blue bonds represent a subset of green bonds, and while some ocean-related projects will have been financed through green bonds in the past, escalating use of the ‘blue’ nomenclature presents a timely opportunity to critically interrogate these early initiatives to provide insights and forewarnings that actors developing upcoming blue bond offerings, principles, and policy can heed. The study uses the green bond literature as a start point, to develop an analytical framework that is applied to five bonds that are the first to use the ‘blue’ label. Through a comprehensive content analysis of sources such as blue bond project documents, press releases, and secondary interviews, the article synthesises the characteristics of these blue bonds and their projects, and considers broader trends related to their thematic scope, geographical scope, environmental impacts, and financial returns. The article contributes to the literature by uniting green bond theory with emergent blue bond empirics to identify challenges for the development and credibility of blue bonds that will be relevant to scholars, investors, and practitioners interested in blue bonds as a mechanism for financing marine conservation and the transition to a sustainable ocean economy.