Climate change is impacting ocean temperatures, which reached their highest level on record this summer. The implications are far-reaching. Oceans have a vital role to play in climate change, absorbing roughly 30% of global CO2 emissions.
While, at an economic level, the ‘blue economy’ – the activities that depend on the ocean and its resources – accounts for an estimated 5% of global GDP, funding to preserve this critical resource has been limited.
Traditionally, investors with a sustainable lens have focused on green bonds, which finance projects related to broad environmental objectives. Blue bonds, on the other hand, are a relatively new phenomenon with still evolving characteristics.
They aim to support the sustainable use of ocean resources for economic growth, improve the livelihoods and jobs associated with the blue economy and preserve the health of the ocean ecosystem.
For example, blue bond issuers can use the proceeds to finance projects such as the reduction of plastic waste in the oceans. For investors, blue bonds can offer financial returns, while supporting sustainable development and environmental conservation.
But corporate issuance of blue bonds is still relatively rare. This is partly due to the novelty of this structure, which still needs to be strengthened, and partly because companies as issuers are usually less directly exposed to the risks and opportunities of the oceans.
Once we see improved structures and disclosures, we may also see increased corporate issuance. Having simpler and more transparent structures that investors can trust may also stimulate the hitherto limited investor demand.
The current uncertainty surrounding the structure and disclosure standards of blue bonds is not that surprising. Innovations in the field of sustainable investments inevitably take time to mature.
In the meantime, we believe investors should proceed with caution, with the support of managers who are able to provide independent evaluation of individual bonds and issuers.
A seal of approval — even that of a company that has made a reputation for itself with sustainability ratings — is no guarantee of effectiveness.
Not all blue bonds are equal. Investors should do their own due diligence to ensure the integrity of the underlying bond framework and to understand how it promotes positive outcomes.
So-called debt-for-nature swaps are an area where we believe investors should remain cautious. In this type of structured transaction, a creditor usually grants debt relief to a state entity and in return the state entity commits to investing part of the saved debt in marine conservation.
Though the potential benefit to investors, borrowers and the ocean sounds tempting, the complexity of the structure makes it costly to implement and in many cases the benefits to the blue economy are small in relation to the volume of transactions.
With only a fraction of blue bond proceeds going to ocean-related projects, there are reasons to be sceptical about the current generation of these blue bonds.
However, the tide is turning with increased issuance under the more traditional ‘earmarked proceeds’ structure that we know from green bonds. Looking ahead, blue bonds may pursue the course taken by the green bond market, which is now larger and of higher quality today than it was five years ago.
Increased attention, standardisation and regulation of the blue bond market will improve quality, and therefore increase investment. With growing concerns surrounding climate change, more investors will be turning to blue, use-of-proceeds bonds such as these.
Already, we think this nascent asset class offers interesting investment opportunities to selective investors and we expect it to burgeon into a sizeable new universe with attractive impact and financial return potential.
Campe Goodman is a fixed Income portfolio manager and Will Prentis is an investment specialist at Wellington. The views expressed above should not be taken as investment advice.