The Big Blue

All - Nov 09 2018

Analyst insight

As green bonds are getting more common, a new financial instrument of the same kind has just been created.

The innovative ‘blue’ bond will support sustainable ocean-based projects aiming to preserve marine environments. Its goals abide by the Blue Economy Finance Principles (BEFP) for ocean health and investments, a set of 14 principles for blue finance developed in 2017 by the European Commission, the WWF, the Prince of Wale’s International Sustainability Unit and the European Investment Bank.

The first sovereign blue bond, issued recently by the Republic of Seychelles, is based on 10-year notes with a 6.5% coupon and has succeeded to raise USD 15 m. It will help preserve the local marine environment without endangering the financial stability of the nation’s islands. Though the Seychelles are rated BB- by Fitch, this issuance is unrated and additionally benefits from international subsidies. The World Bank (IBRD) ensured a USD 5 m repayment guarantee and the Global Environment Facility (GEF) promised a USD 5 m concessional loan on the coupon payment, thus lowering the real borrowing costs by 2.8%.

This sovereign ‘blue’ bond illustrates the recognition by officials of the critical importance of marine resources for economic growth. For instance, in small island developing states (SIDS) and coastal countries, the fishing sector can be primordial to GDP, to employment and to the value of domestic exports. Blue bonds may cover a variety of projects, such as the expansion of marine protected areas, the rebuilding of fish stocks, the restructuring of fishing capacities, the improvement of fisheries’ governance, the implementation of harvest control measures or the financing of scientific support services. Over time, better management of the marine resources should generate revenues for the government.

In addition to making business sense, blue finance could help develop the knowledge related to the threats to marine ecosystems, including pollution, the use of plastics (see Beyond Ratings’ analysis on the subject published on July 19, 2018: “Only dead fish go with the flow… together with plastic”) and climate change. On the latter, the recent Special Report from the Intergovernmental Panel on Climate Change warns that even a warming by 1.5°C compared to preindustrial levels will have catastrophic effects on oceans. Harvests of marine fisheries are expected to decline by 1.5 million tonnes and 70% to 90% of coral reefs would die before 2100. For a 2°C warming, the losses in harvests may reach 3 m tonnes and 99% of the world’s coral reefs may be devastated.

Coral reefs are mostly known for their colourful shapes and as a famed touristic destination. However, the climate-related acidification of waters induces massive bleaching of corals, which seriously hinders their growth and eventually leads to their death. This adds to other human-related impacts: overwhelming algae and parasites as an indirect impact of overfishing, damages from boats and anchors, vulnerability to diseases increased by pollution from agricultural activities and runoff from cities. Consequently, half the world’s coral reefs have already been destroyed over the last 30 years and, given the current warming trajectory, nearly all could be wiped out by 2050. Coral reefs only cover 1% of ocean floors so their devastation might seem anecdotal, however, they play an essential part in the dynamics of ocean ecosystems. They provide nutrients essential for marine life, and 25% of fish species take shelter in reefs at some point of their life cycle. Reef structures also protect the shores, by blunting up to 95% of waves’ energy and acting as natural barriers against storm surges. The large-scale loss of corals could therefore bring on much broader collapse, including strong fallout of the fishing and tourism industries, and related economic systems.

In other words, it is clearly worth coming up with ways to protect the reefs, as well as other marine resources, and finance can play its part. On top of financing projects related to fisheries as mentioned above, investments could be made in pioneering research to identify corals particularly resistant to heat or acidity, or able to quickly regrow so that dying reefs can be repopulated. Financial incentives may also engage the population or tourists on such issues. As such, the Seychelles’ blue bond could be a model for other countries and regions that have an interest in protecting their marine environments. Blue bonds and other ocean-themed instruments that combine public and private finance could enable the empowerment of local communities and businesses for the management of their marine resources. The Seychelles’ example demonstrates that, offshore too, there is potential for such capital mobilization in favour of sustainable actions.

Claire Hugo, Energy-Climate Analyst   
Sources: Beyond Ratings, Environmental Finance, GEF, IPCC, WEF

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