Blue Finance: Financing the Ocean Economy
Through ratifying the Paris Agreement, 189 countries agreed to work together to invest in a low-carbon future, lowering greenhouse gas (GHG) emissions enough to limit the average global temperature increase in this century to 2 ̊ C or less. As well as traditional climate-smart solutions, investment is needed to finance low-carbon solutions to maintain and improve Earth’s marine ecosystems.
Eighty percent of the life forms on Earth live in oceans, and, according to OECD, the ocean economy is expected to double to $3 trillion by 2030. While “green finance” refers to climate-smart investing in virtually any industry or region, “blue finance” is a subset of green finance, dedicated specifically to ocean-friendly projects and water supply resources. Blue finance can include blue bonds, blue loans, and other water-focused investments. As with green finance, investments in blue finance must be profitable, providing benefits for all parties involved. Blue finance is relatively new, but momentum is building. To meet demand, IFC has developed guidelines to help financial institutions (FIs) determine whether projects are “blue”.
IFC’s Green Banking Academy (GBAC) is an online banking knowledge initiative designed to help financial institutions and the private sector in Europe and Central Asia (ECA) learn about green banking and build green portfolios. GBAC advisory services are available to help FIs invest in the blue economy. IFC offers the tools and supports FIs need to invest in these new opportunities, to measure the impact of green (and blue) investments on GHG levels, and to report on green (and blue) investments held in their portfolios.
“Blue bonds today are where green bonds were 10 years ago. The green bond market has seen rapid growth, with more than $1 trillion in total issuance, and blue bonds are poised to see a similarly strong market.”
The Need for Blue Finance
Classifying climate-smart marine-related finance as “blue” allows developers to target investors with a specific interest in water projects. Bonds that focus on a specific category, such as blue bonds, can be referred to as “thematic bonds.” Demand for thematic bonds is increasing, putting blue bonds at the forefront of a growing surge. Blue bonds could attract investors with a specific interest in issues such as sustainable ocean tourism, fishing, port development, or drinking water supplies. Corporations that profit from water resources, such as ocean freight providers, may be willing to pay a premium to purchase “blue” carbon credits to offset their emissions.
Climate change, overfishing, non-sustainable tourism, and pollution have all contributed to the need for financing to restore, maintain and protect marine areas. Globally, economic activity that depends on marine areas, the “blue economy,” is expected to employ 40 million people by 2030. Many investments in the sustainable blue economy (SBE) support the United Nations’ Sustainable Development Goal 14: “Conserve and sustainably use the oceans, seas and marine resources for sustainable development.”
Blue finance also addresses the UN SDG Goal 6: “Ensure access to water and sanitation for all.” Increased financing is needed in this area. The World Bank estimates that 2.2 billion people do not have safe access to drinking water, and 4.2 billion people do not have access to well-managed sanitation services.
“Coral reefs are in a dire situation, 90 percent of the world’s coral reefs will be threatened or very threatened by 2050, and the finance to save the reefs is just not there – it’s estimated the financing gap is currently about seven times short of what is needed.”
Maxime Philp, Fund Design Coordinator, UN Multi-Partner Trust Fund Office
Blue Loans and Blue Bonds
Because blue finance is a subset of green finance, projects considered for blue bonds and loans should meet the criteria for green bonds and loans, but also have a special focus on “blue” uses of proceeds. The process to issue blue bonds or loans is much the same as the process to issue green products.
In the case of loans, organizations can use accepted definition, such as IFC’s Guidelines for Blue Finance, to determine whether or not potential loans and investments can be classified as “blue.” FIs can also use the Guidelines to evaluate existing loan portfolios to determine which loans could be categorized as “blue” and measure their current blue portfolio.
The IFC’s Guidelines include eight categories of eligible project categories:
- Water supply;
- Water sanitation;
- Ocean-friendly and water-friendly products;
- Ocean-friendly chemicals and plastic related sectors;
- Sustainable shipping and port logistics sectors;
- Fisheries, aquaculture, and seafood value chain;
- Marine ecosystem restoration;
- Sustainable tourism services; and,
- Offshore renewable energy production.
These eight categories describe a wide array of potential projects that could be funded through blue loans or blue bonds. For example, the first category, Water Supply, provides details about drinking water, irrigation projects, and other related projects that can be classified as blue. The fourth category includes information about projects that accomplish goals such as preventing agricultural chemical runoff, or using recycled plastics in a circular economy. The IFC’s Guidelines note that each blue project could support climate change mitigation or adaptation to climate change. The Guidelines also specify that projects in each category could:
- provide pollution prevention and control;
- support natural resource conservation; or,
- enhance biodiversity.
Combining multiple blue loans to issue a blue bond would position FIs to attract investors with an interest in water issues. Organizations issuing blue bonds can follow the International Capital Market Association’s (ICMA) list of voluntary Green Bond Principles. This list includes four primary factors:
- Use of Proceeds: Funded projects must provide clear environmental benefits.
- Process for Project Evaluation and Selection: Issuers must be able to explain how funded projects have been chosen. IFC’s Guidelines for Blue Finance provide a clear method of classifying projects as “blue”.
- Management of Proceeds: Issuers must keep transparent records regarding the use of funds.
- Reporting: Clear reports are key to building investor confidence.
Oceans absorb 30 percent of the carbon dioxide produced by humans. The ocean has absorbed 90 percent of the excess heat in the climate system.
The Kyoto Protocol established a system of carbon credits, a system that provides “carbon credits” when it is proven that greenhouse gasses have been reduced or sequestered. Voluntary carbon markets allow the owners of these carbon credits to sell them to willing buyers. Corporations wishing to offset their own greenhouse gas emissions and/or enhance their “green” reputation are typical willing buyers of voluntary carbon credits.
The process for issuing and earning green carbon credits has been firmly established in some area of the economy such as energy generation – areas where data is readily available, greenhouse gas emissions are easily measured, and standards have been established. Carbon credits in other sectors of the economy are still evolving. This includes agriculture, where it is more difficult to accurately measure greenhouse gas emissions and sequestrations.
Blue carbon markets are the next frontier. Buyers for blue carbon credits are likely to be organizations that want to link their offsets to the environment where they work. Ocean shipping companies may prefer blue carbon credits to agricultural carbon credits.
Coastal ecosystems like mangrove forests, tidal marshes, and seagrass meadows are carbon sinks. There is great potential to capture and store carbon dioxide in these areas. To date, mangrove forests have been the focus of this work. Mangrove forests can store carbon at high densities – per hectare, a mangrove forest can store up to eight times more carbon than an inland forest. Researchers have a strong understanding of carbon flows and the impacts of restoration in mangrove forests, and have collected high-quality data. According to a recent report by the UN Environment Programme, if all of the potential carbon credits earned through mangrove forest restoration could be sold at a premium price, the total world market for mangrove blue carbon credits alone could be worth $11.1 billion.
“Blue carbon is going to grow exponentially in the next 12 to 18 months; I would expect to see it featured highly at COP27. Without a doubt, people are waking up to the huge opportunity that the ocean presents to solve climate change, food security and poverty.”
Kristian Teleki, Global Director, Ocean Program World Resources Institute
Banking Opportunities in Blue Finance
There are many ways banks and other financial institutions can profit from blue finance.
- Offering and marketing blue loans may attract new borrowers in areas of business that are new to the bank.
- Adding a blue component to a loan portfolio that already includes other types of green loans can help a financial institution diversify risk.
- Marketing campaigns highlighting a bank’s blue portfolio may attract new clients with an interest in ocean issues.
- Promoting green and blue finance signals to the public that an FI is working to reduce the impacts of climate change and understand the future direction of global financial flows.
- Blue finance offers FIs an opportunity to become early players in a fast-growing segment of the new economy.
Although much of the discussion and promotion of blue finance is focused on oceans, financial institutions in landlocked countries also have an important role to play in blue finance. Inland rivers and seas provide a link to the world’s oceans. Inland production of many goods and services are linked to value chains that include oceans. And, of course, drinking water facilities and irrigation are necessary in every part of the world.
Sustainable Development Goal 14 is the least funded of the UN’s SDGs. Researchers have estimated the need for additional funding for ocean health at $174.52 billion per year.
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