Capital Markets Disruption: The Ripple Effect Created by Blue Bonds
In a bid to preserve and protect the world's oceans, several countries, including Seychelles, Indonesia, Colombia, Gabon, Belize, and Barbados, have turned to blue bonds as a innovative financing solution. This article outlines the key steps involved in issuing a global-standard blue bond, following the UN's recommendations and global best practices.
- Establishing a Transparent Eligibility Framework
The first step in issuing a blue bond involves creating a clear and rigorous framework. The use of proceeds must be defined to fund eligible marine and water-related projects, such as sustainable fisheries, marine conservation, and ocean pollution control. To ensure credibility and transparency, the framework should align with recognised principles like the Green Bond Principles (GBP) 2021, Green Loan Principles (GLP) 2023, and the IFC Guidelines for Blue Finance.
- Building Institutional Capacity
To structure and issue blue bonds, finance ministries, central banks, and regulators must build internal capacity. This includes research, legal setup, and investor engagement preparations. Stakeholder involvement is crucial to ensure government and regulatory buy-in, particularly in countries new to blue bond issuance.
- Third-Party Review and Certification
An independent second-party opinion or certification is essential to verify alignment with market standards and assess the environmental integrity of the bond. This step enhances investor confidence and helps meet UN and international transparency expectations.
- Structuring and Issuance
The bond must be structured in accordance with local and international financial regulations and tax codes, ensuring compliance. Underwriters, legal advisors, and rating agencies may be engaged as needed.
- Marketing and Investor Relations
Targeted marketing is crucial to attract investors interested in sustainable and blue finance. Clear documentation and disclosures on how funds will be used and monitored are essential.
- Monitoring, Reporting, and Impact Assessment
Regular reporting on the use of proceeds and environmental impact, aligned with the original framework, is necessary. Reports should be made according to recognised standards to maintain transparency for investors and stakeholders.
When issuing sovereign blue bonds, a debt-for-nature swap structure can be considered. Examples of projects financed by blue bonds include investments in coastal ecotourism, sustainable energy, sustainable maritime transport, sustainable marine fisheries management, clean water and waste water management, and port infrastructure.
As climate change becomes more pressing, blue bonds are expected to grow in popularity as a means of addressing the least funded UN SDG, SDG 14 (life below water). Blue bonds are seen as an innovative method of financing projects that provides economic, social, and environmental benefits to all stakeholders.
However, it's important to note that debt-for-nature swaps, which involve a developing country's external debt being forgiven or reduced in exchange for local environmental conservation measures, are more complex and expensive to implement compared to the traditional use-of-proceeds blue bond structure.
The blue economy is expected to double in size to U.S.$3 trillion by 2030, creating 40 million jobs and becoming the eighth largest economy in the world. As the world moves towards a more sustainable future, blue bonds are set to play a significant role in financing projects that contribute to a healthier and more prosperous ocean.
- To guarantee that the blue bond objectives align with the field of environmental-science, the proceeds from the bond could be allocated to initiatives that promote research in sustainable marine conservation, pollution control, and marine ecology.
- By incorporating financial metrics that measure environmental performance, such as key performance indicators (KPIs), the blue bond could demonstrate a return on investment by quantifying the positive impact of marine conservation projects in terms of science and finance.
