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A blue bond is a relatively new type of sustainability bond, which is a financing instrument issued to promote investments in healthy seas and blue economies. Similar to traditional bonds, investors contribute money to a bond issuer who commits to pay back the capital plus interest on a specific date each year for the duration of the bond. Earnings from investments in viable blue economy enterprises are included in a blue bond. A blue bond’s issue also gives investors the chance to uphold their corporate social obligations and benefit both people and the ocean.
How does Blue Bond works?
The issuer of a blue bond needs to have a revenue stream in order to pay back the principal and interest. The blue bond, also known as a “use of proceeds” bond, financing strategy is one that is supported by the Asian Development Bank (ADB). On September 10, 2021, ADB released its first blue bond as an illustration of this strategy. Additionally, using the proceeds model, Bank of China1 and Nordic Investment Bank2 have issued blue bonds. There are various varieties of blue bonds; for instance, the Republic of the Seychelles3 issued a blue bond that was backed by a debt swap in addition to other revenue sources.
What type of projects can be funded by Blue Bond?
A framework document is needed, just like with all theme bonds (including green, climate, and social and sustainability bonds), to specify which projects are eligible for funding. To facilitate its own issuance of both green and blue bonds, ADB established the Green and Blue Bond Framework with a Second Party Opinion provided by CICERO Shades of Green. The Green Bond Principles of the International Capital Markets Association and the Sustainable Blue Economy Finance Principles of the United Nations Environment Programme Finance Initiative are both supported by the ADB framework. It also includes exclusion criteria and a typology of project categories that are eligible. To ensure that investors have confidence and openness in project selection, governments may decide to create their own structures to facilitate blue bond issuing.
Blue Economy Sectors:
- Ports and Shipping
- Ocean-Draining River Rehabilitation
- Solid Waste Management and Circular Economy
- Wastewater and Sanitation
- Ecosystem Management and Restoration
- Coastal and Marine Tourism
- Marine Renewable Energy
Who Can Issue Blue Bond?
Governments, banks, and corporations can all issue blue bonds. This fast start guide focuses on sovereign blue bonds, which can be issued by governmental entities or organizations with whom they are linked.
Blue Bonds: Accelerating Sustainable Ocean Business
- The bond market, which is the largest asset class in the global financial market, can significantly contribute to the acceleration of investments aimed at achieving the Sustainable Development Goals (SDGs).
- The potential for a blue bond label to be nested within existing green, social, or sustainability-linked bond principles is enormous given the considerable investor demand for thematic bonds.
- The Sustainable Ocean Principles and the Five Tipping Points for a Healthy and Productive Ocean can be used as a framework to direct investments.
- The blue economy, which supports the livelihoods of around 3 billion people globally and is estimated to be worth roughly US $3 trillion annually, is the seventh largest economy in the world by GDP.
- SDG 14: Of all the SDGs, life below the ocean now receives the second-lowest level of funding. Nevertheless, the ocean is crucial to promoting sustainable development.
- Where green bonds were ten years ago, blue bonds are now. With more than $1 trillion in total issuance of green bonds, the market has experienced tremendous expansion, and the market for blue bonds is expected to follow suit.
ADB Issues First Blue Bond for Ocean Investments
Philippines, Manila (10 September 2021) — Australian and New Zealand dollar-denominated dual-tranche blue bonds, the first of their kind from the Asian Development Bank (ADB), were issued today to fund ocean-related projects in Asia and the Pacific.
The Dai-chi Life Insurance Company bought the A$208 million ($151 million) 15-year issue, which was negotiated by Citigroup Global Markets Limited. Meiji Yasuda Life Insurance Company bought the NZ$217 million (or roughly $151 million) 10-year issue, which was arranged by Credit Agricole CIB. Under the ADB’s enlarged Green and Blue Bond Framework, the bonds were issued.
A major milestone for sustainable ocean finance is the issuance of the first 15-year Australian dollar and 10-year New Zealand dollar blue bonds under the Green and Blue Bond Framework of the Asian Development Bank. According to ADB Vice-President for Finance and Risk Management Ingrid van Wees, the tone “reflects the demands and our long-term support for the industry.” With our approach, we created a new, replicable standard for blue finance in the market.
The bonds are a component of the ADB’s Action Plan for Healthy Oceans and Sustainable Blue Economies, which was introduced in 2019. The plan’s goal is to catalyze sustainable investments in Asia and the Pacific by pledging to invest and offer technical assistance totaling at least $5 billion by 2024.
Seychelles launches World’s First Sovereign Blue Bond
The Republic of Seychelles has introduced the first sovereign blue bond in history, a ground-breaking financial tool created to aid in sustainable marine and fisheries projects.
The bond, which collected $15 million from foreign investors, shows how nations can use capital markets to finance the sustainable exploitation of marine resources. Calvert Impact Capital, Nuveen, and U.S.-based Prudential Financial, Inc. were the three investors who were contacted by the World Bank to help create the blue bond.
“We are proud to be the first country to introduce such a cutting-edge financing method. The blue bond will significantly help Seychelles achieve a transition to sustainable fisheries and safeguard our oceans while we sustainably develop our blue economy, said Vincent Meriton, Vice-President of the Republic of Seychelles, who made the announcement at the Our Ocean Conference in Bali. The blue bond is part of an initiative that combines public and private investment to mobilize resources for empowering local communities and businesses.
The expansion of marine protected areas, better management of key fisheries, and the advancement of the blue economy in the Seychelles will all benefit from the bond’s proceeds. Grants and loans will be given through the Blue Grants Fund and Blue Investment Fund, which are run separately by the Development Bank of Seychelles and the Seychelles Conservation and Climate Adaptation Trust (SeyCCAT) (DBS).
An archipelago of 115 granite and coral islands makes up the Seychelles. Its 455 km2 of land are dispersed over a roughly 1.4 million km2 Exclusive Economic Zone. Seychelles, one of the world’s biodiversity hotspots, is juggling the need for both economic growth and the preservation of its natural resources.
For the nation to experience economic progress, marine resources are essential. The second-largest industry in the nation after tourism, the fishing sector generates significant annual GDP and employs 17% of the workforce. Approximately 95% of the value of domestic exports is made up of fish products.
Blue Bonds and Developing Nations
Developing countries can benefit from blue bonds as well. This is so because Africa boasts the world’s longest coastline. There are over 47000 kilometres of coastline. Each year, the GDP of industries like aquaculture and fisheries totals about $25 billion. Nearly 13 million individuals are employed as well. Blue bonds are being utilized to ensure the sustainability of the ocean and related industries. This will guarantee that the African continent has enough food and that its citizens have productive employment.
Challenges Faced by Blue Bonds
At some point, the financial assistance received while a project was being built must be reimbursed. The lack of self-sustainability of the projects is a problem with blue bonds. If projects impose fees on beneficiaries, they can raise funds. The project’s beneficiary or the polluter the government is funding might both be considered this beneficiary. It might be challenging to identify both polluters and beneficiaries in ocean-related projects. This is due to both the size of the oceans and the isolated areas where the pollution actually occurs. Additionally, the beneficiary is frequently a government organization. Therefore, there is a cap on the amount of taxpayer money that can be used to clean the ocean. The sustainability of the oceans is still not seen as a major political concern.
Blue bonds will therefore need to develop a revenue strategy that relies more on the funds raised by the project itself and less on government funding. Given the existing limitations, they are, nonetheless, a fantastic tool to influence investors, non-governmental organizations, and supranational financial organisations to raise funds.
Blue Bonds: Five Things to Know
Blue Bonds fund commitments towards oceans, water related initiatives and sustainability.
When a firm issues a blue bond, it expressly agrees to use the revenues to fund commercial solutions for freshwater, ocean health, and/or to expand access to clean water.
Blue bonds should be based on universally acknowledged standards and can be issued as a subset of green, social, and sustainable bonds. Issuers are urged to employ the social and green bond standards from ICMA that have been modified for a blue use of profits until a universally acknowledged set of blue bond principles is available. Furthermore, ethical business practices might be influenced by the UN Global Compact Sustainable Ocean Principles.
Potential blue bond issuers should exhibit a broad commitment to advancing the Sustainable Development Goals beyond the specific use of proceeds at the business strategy level (SDGs). A larger spectrum of concerns will have access to chances thanks to this “Blue” eligibility criterion.
The blue economy can create a triple win for people, nature and economic development
All 17 SDGs must be accomplished in order to maintain a productive and healthy ocean. The ocean, which covers 70% of the earth, slows down climate change by storing a significant amount of carbon dioxide.
An increasing population will have food as a result of the expansion of the sustainable maritime economy, which will also promote low-carbon transportation. Additionally, it has the ability to produce virtually endless renewable energy. To achieve the Paris Agreement’s objectives, which include keeping the rise in global temperature to well below 2 degrees Celsius compared to pre-industrial times, business solutions for a healthy ocean are crucial.
Prior blue bond issues concentrated on infrastructure projects connected to water as well as marine conservation and restoration. Blue bonds, however, can promote more business possibilities that have a good impact on the ocean and water-related initiatives and assist sustainable development by extending qualifying requirements and frameworks.
The blue economy offers a variety of sustainable business alternatives. When used to fund initiatives and businesses aiming to directly address ocean and water-related problems, blue bonds can also advance social inclusion, economic growth, environmental conservation, and other goals. Goals for 2030.
Blue Bonds are not just for fisheries and shipping companies
Blue use of proceeds can be used to fund sustainability initiatives that operate in or near the ocean, seas, or freshwater, such as ports, shipping, infrastructure, tourism, fisheries, aquaculture, or offshore renewable energy; or initiatives that directly affect the ocean, seas, or freshwater, like manufacturing, consumer packaged goods intended to reduce waste, sustainable textiles, or integrating SMEs with sustainable practices to increase value chain resilience, reducing agrochemical runoff, water and sanitation.
There are great opportunities in Latin America and the Caribbean for a thriving blue economy
The shoreline of LAC stretches for more than 70,000 kilometers. The blue economy is crucial for sustainable business in Latin America and the Caribbean because 100% of people in the Caribbean and 25% of people in Latin America live near the shore.
The Caribbean region offers a particularly evident business opportunity for blue bonds because there are 23 small, island states that depend almost totally on long-term oceanic health. According to research, the Caribbean region generated gross profits from ocean use of at least $407 billion, primarily from shipping, mining, tourism, and fisheries.
It will be especially important to maintain ocean health for future generations and to invest in naturally occurring climate change adaption strategies like coral reef and mangrove management. Blue bonds offer the chance to rebuild more effectively and have a significant impact on the blue economy of the area through greater finance and effectiveness.
Blue bonds are where green bonds were ten years ago
Institutions that specialize in development finance were crucial in establishing the legitimacy of the green bond idea. In order to support businesses interested in issuing blue bonds and draw institutional investors, IDB Invest has now committed to expanding the blue bonds market in the same manner.
Similar to green bonds, blue bonds could result in additional expenses for internal planning, reporting, and external reviews. The advantages of themed bond issuance, such as high demand and better financing arrangements, including greater transaction sizes and longer maturities, are becoming more and more apparent to issuers.
If an issuer sets strong, transparent, and verifiable targets with precise eligibility requirements for how the revenues will be used, they are eligible to issue blue bonds at any stage of their sustainability journey. Companies and industries in transition may also access the market to hasten the transition to a net-zero future.
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