Capital Market Innovations: Creating Waves with Blue Bonds
The concept of blue bonds is gaining traction as a powerful tool for funding projects that contribute to the health and sustainability of marine and aquatic ecosystems. These bonds, a sub-type of green or ESG (Environmental, Social, and Governance) bonds, are expected to double in size to $3 trillion by 2030, creating 40 million jobs.
Blue bonds must adhere to the Sustainable Development Goals (SDGs) adopted by the United Nations in 2015. Issuers are tasked with developing a sustainable finance framework that outlines clear targets, regularly discloses sustainability performance metrics, and contributes to the relevant SDGs, particularly SDG 6 (clean water and sanitation) and SDG 14 (life below water).
The process of issuing a blue bond involves several key steps. First, a sustainable finance framework is established, defining the use of proceeds, project eligibility criteria, management of funds, and reporting standards. This framework aligns with international standards such as the ICMA Green and Social Bond Principles, ASEAN Sustainability Standards, and IFC’s Blue Finance Guidelines.
Next, eligible projects are selected. These projects directly contribute to the health and sustainability of marine and aquatic ecosystems. Common suitable projects include marine biodiversity conservation, sustainable fisheries management, pollution reduction in oceans and coastal areas, clean water supply and sanitation infrastructure, and climate resilience projects related to oceans and coasts.
Following this, the bond is structured and registered with relevant regulatory bodies. For instance, Maynilad’s Php 15 billion blue bond was registered with the Philippines' Securities and Exchange Commission. The bond is then marketed to investors interested in sustainable and impact investing, with strong investor appetite indicated by oversubscription, as seen in Maynilad’s issuance.
Post-issuance, issuers commit to regular, transparent reporting on the use of proceeds and environmental impact metrics to maintain investor confidence and meet sustainability goals.
The blue bond market has grown significantly, rising to about U.S.$7.2 billion by July 2024. It is expected to continue growing due to increased demand for sustainable solutions and the urgent need for funding in the marine industry. Notable blue bond issuers include DP World, the first company in the Middle East to issue a blue bond in December 2024, and France's Saur Group, which raised EUR 550 million through its blue bond issuance in October 2024.
Sovereign entities, financial institutions, multilateral development banks, corporations, and municipalities can all be blue bond issuers. Investors in blue bonds range from high-net-worth individuals to venture capital firms and investment banks. These bonds can finance large-scale infrastructure projects such as maritime transportation and marine renewable energy.
Examples of projects financed by blue bonds include coastal ecotourism, sustainable energy projects, sustainable maritime transport, sustainable marine fisheries management, clean water and waste water management, and port infrastructure projects that prevent marine pollution. Issuers and investors view blue bonds as an innovative way to promote sustainable marine practices and facilitate the development of the blue economy.
In sovereign blue bond issuances, the debt-for-nature swap structure is an alternative to the regular use-of-proceeds bond issuance. This structure involves a developing country's external debt being forgiven or reduced in exchange for local environmental conservation measures.
The United Nations recommends that issuers of blue bonds align their proposals with global standards and blue bond-specific guidance, such as the ICMA's Green Bond Principles, to ensure transparency and credibility. As the blue bond market continues to grow, it presents a promising avenue for addressing the underfunding of SDG 14 and promoting sustainable marine practices.
- The blue bond market, estimated to reach $3 trillion by 2030, is a significant financial tool for funding projects that contribute to clean water and sanitation, marine biodiversity conservation, and climate resilience in oceans and coasts, among others.
- To maintain investor confidence and meet sustainability goals, issuers of blue bonds are required to regularly report on the use of proceeds and environmental impact metrics.
- Blue bonds are not only issued by sovereign entities but also by financial institutions, multilateral development banks, corporations, and municipalities, funding projects such as sustainable maritime transport, marine renewable energy, and port infrastructure that prevent marine pollution.
