Blue Finance: Can Ocean health lead to wealth?
- Posted By
7th January, 2021
- Investment in projects that restore and protect the ocean environment and support sustainable ocean economic activities is known as blue finance.
- Its growth is driven by investments that reduce carbon emissions and pollution enhance energy efficiency, harness the power of natural capital—such as the oceans—and halt the loss of biodiversity and the benefits that ecosystems provide.
- Blue finance is essential for a transition to a blue economy. For developing a pipeline of bankable ocean investments, innovating finance instruments, mobilizing capital, aligning taxes and subsidies, and strengthening policy, knowledge, and capacity.
- Concept of a blue economy came out of the 2012 Rio+20 Conference and emphasizes conservation and sustainable management, based on the premise that healthy ocean ecosystems are more productive and form a vital basis for sustainable ocean-based economies
Need for Blue finance
- The largest ecosystem on earth, the ocean is the lung of the planet, providing the oxygen for every second breath we take.
- It provides the main food source for almost half of the world’s population and plays host to an estimated 80% of the planet’s biodiversity. Major industries such as shipping, fishing, aquaculture, and coastal tourism depend upon ocean health.
- With an annual economic value estimated at USD$2.5 trillion, equivalent to the world’s 7th largest economy, the blue economy is increasingly attracting investors, insurers, banks, and policymakers as a new source of opportunity, resources, and prosperity.
- However, its rapid unsustainable growth can lead to environmental risks and losses in natural capital, eroding the ocean’s resource base and creating regulatory, market and physical risks.
- Oceans are under pressure from a long list of harmful human activities, topped by ocean plastic, rising temperatures and coral bleaching.
- Ensuring ocean health will require new investment,and targeted financial instruments—includingblue bonds, insurance and debt-for-adaptationswaps—can help leverage this investment inorder to ensure that it maximizes a triple bottomline in terms of financial, social, and environmental returns.
- A growing number of investors want to be able to show the positive impact of their investments, and that feeds a virtuous circle. Funds are used to create more protected marine area, since oceans also capture and store 30 percent of greenhouse gas emissions.
- Organisation for Economic Co-operation and Development expects an additional two billion people worldwide by 2050.
- Modernising shipping fleets will also become a priority as trade surges with population growth.
- A group of 11 multinational banks announced the "Poseidon Principles" which aim to help shipping firms cut their emissions in half within 30 years from the levels of 2008. It's a massive effort that is expected to muster a fourth of the global shipping finance portfolio, or some $100 billion.
- New wave of Investment: From food production and marine biotechnology research to seabed mining and renewable energy production, investors are expecting a wave of initiatives in the waters that cover 70 percent of the Earth's surface.
- According to the World Bank , Ventures will also require stepped up efforts to keep oceans clean and viable—eight million tonnes of plastic are entering each year, and over-fishing that has already severely depleted some stocks.
- Issue of Bonds: Another way ocean conservation is being funded is through bond issuance. Back in 2008, the World Bank issued the first ever green bond, creating a market that has since seen almost $850 billion of issuance. In 2018, the World Bank then worked with the Seychelles to issue the world’s first blue bond—a $15 million deal to support sustainable marine and fisheries projects.
- Seaweed: Banks are likely to play a central role in developing the commercial blue bond market, following the Bank of China’s debut deal. Seaweed can become the largest blue economy industry of tomorrow because seaweed can be used for many things—for food, for packaging, for textiles, for biomedicine, for cosmetics, for biofuel. “If we develop seaweed farming we will be able to reallocate a lot of resource that we use on land and move it to the ocean.
- Tracking at Stock Market: There have been efforts for development of blue finance investment solution that allows investors to buy shares in an index fund that tracks the stock-market performance of water-related companies—such as water treatment and desalination businesses.
- Gap in Investment: Coral reefs are in a dire situation, 90% 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.
- Coral reefs is one of a number of potential marine projects that are being identified for investment by a consortium of conservationists, philanthropists, private companies and multiple United Nations agencies. Those include the UN Development Programme through the Global Fund for Coral Reefs, which aim to raise and invest $500 million to protect reefs over the next decade.
- Blue finance initiatives can improve coral reef resilience by funding businesses that reduce the impact of activities like overfishing, tourism and wastewater runoff, particularly from agriculture and invest in local wastewater treatment plants, ecotourism or better fisheries management.
- Role of Private Capital: Public sector finance and philanthropic capital alone arenot sufficient to finance a transition to a blue economy.Private capital also has a role to play.
- The Coalition for Private Investment in Conservation was launched during the2016 IUCN World Conservation Congress; it aims to helppreserve the world’s most important ecosystems by creatingnew opportunities for return-seeking private investmentin conservation.
- There are also efforts to create linkagesbetween investors and those needing funding throughinitiatives such as the World Ocean Investment Platform by World Ocean Councilas a global structure and process to bringthe investment community together with major ocean usecompanies and the companies providing the solutions toocean sustainable development challenges
Lessons from Seychelles
- The launch of the Seychelles blue bond was a landmark moment for the ocean economy. Although only US$15m in value compared to the average value of US$108m for green bonds issued in 2018, the introduction of blue bonds has already sparked conversations between governments, conservation groups and financial institutions seeking to replicate the success of green bonds.
- Critical to the success of this innovative financing instrument is the demonstration of its ability to improve ocean sustainability.
- In Seychelles the Conservation and Climate Adaptation Trust (SeyCCAT) has been set up to co-manage the funds from the blue bond as well as an earlier debt-swap. Project monitoring and evaluation are among their core activities.
- The process also entails a mandatory site visit once a year from SeyCCAT. The cost of this can be high, particularly in Seychelles where islands are dispersed. But the World Bank, a guarantor of the blue bond, is funding an international consultant to support oversight efforts. It provides Seychelles with a monitoring and evaluation framework as well as tools and guides that can assist Seychelles in its jobs.
- The experience in Seychelles provides valuable lessons for strengthening accountability in blue finance around the world, particularly for small island development states. These techniques can be applied elsewhere to strengthen governance in marine protected areas (MPAs) too.
- Good governance of MPAs includes strong stakeholder engagement and continuous monitoring to ensure that activities are well managed.
- Experts say that to see the most productive blue financing boom, governments will have to step up and coordinate their ocean efforts as well. Some challenges are really problems that can be solved with debt financing, like water management infrastructures.
- But others, like dealing with the proliferation of plastics, will depend more on public policies and raising public awareness worldwide
- Blue financing" also encompass a range of smaller projects, such as fishery improvements or expansions that don't require the financial firepower offered by capital markets.
- Fragmented Blue economy: The blue economy is fragmented, and most of their requirements would be less than $50 million.There isn't a lack of capital, but a set of common rules will have to be established to ensure the money goes where it's needed most.
- The European Commission has already made a start, laying out in January 2018 its "sustainable blue economy finance principles" after consulting with groups like the World Wildlife Fund and the European Investment Bank.
Blue Carbon Finance and Creation of Wealth
- Blue carbon ecosystems (i.e. mangroves, tidal marshes and seagrasses) support livelihoods, stabilise and protect coasts, and can play an important role in climate change mitigation and adaptation.
- Although lots of efforts are being placed to enhance the protection and restoration of blue carbon ecosystem, the finance mechanisms and policy frameworks that are needed to facilitate investment into protection and restoration remain poorly developed.
- Creation of Jobs: The OECD estimates that the blue economy will be valued at $3 trillion by 2030, double what it was worth in 2010, and generate around 40 million jobs.
- Blue Town Model: On the Fijian island of Vanua Levu in the South Pacific, plans are under way to create a ‘Blue Town’—a model for developing sustainable communities that can help conserve coastal areas, mangroves and coral reefs. If successful, the initiative would be funded through, blue finance that supports water-related projects.
- Fiji project,also aims to invest in sustainable businesses such as sanitary landfill and oyster hatcheries.
- Economic Diversification: It is also clear that SIDS (Small Island developing countries) and coastal LDCs (Least developing Countries) often lack the capacity, skills and financial support to better develop their blue economy. Thus countries must help to make the blue economy an important vehicle to sustain economic diversification and job creation in these countries.
Challenges of Blue Finance
- Limited return for Investors: One of the challenges with blue finance is that there is a limited pipeline of bankable ocean conservation projects that have the ability to generate returns for investors. That means grants and other concessional money are often needed to help develop and incubate projects to make them a more attractive investment.
- Sustainable Revenue Streams: Marine conservation has been subsidised by grants and government money, and every two years there is demand for more, so there is a need to break this cycle by creating sustainable revenue streams for marine protected areas (MPAs) to finance themselves.
- It includes
- selling blue carbon credits through mangrove and seagrass conservation and restoration
- ecotourism—such as charging entry fees for marine park use
- sustainable fisheries
- Much of what has to be done in the blue economy is regulation.
- Various nonprofit aims to steer the massive amounts of funds raised by debt issuance toward low-carbon and other climate-friendly projects.That could mobilise millions for offshore wave or wind energy ventures as pressure mounts on governments to tackle greenhouse gases and smog.
- The money could also finance coastal renewal projects that will become more urgent as cities grow, and as more retirees and as well as tourists flock to pristine beaches and resorts.
- In order to expedite the development of governance frameworks for blue finance, governments and other organisations can draw on their experience of green finance. In the green economy there are industry bodies that provide second party opinions and auditors that check allocation and impact reporting on a yearly basis rather than having peopleself-certify.
- For their sustainability bonds, in addition to securing second party verification, Standard Chartered provides a pre-issuance verification document, detailing the geographical breakdown of assets. Investors could really see what their money was going towards at the outset, for instance, SME lending in Kenya or microfinance in Nepal.
- Putting a transparency framework in place will help ensure that much-needed investment is directed towards sustainable projects for the ocean economy, such as offshore wind and natural coastal infrastructure.
- It will also guide investments that have already been committed, such as the Asian Development Bank’s US$5bn Healthy Oceans Action Plan. Facilitating conversations between governments, conservation groups, academia, multilateral organisations and the finance community will be pivotal. Urgent action must be called forto ensure that no opportunity is missed.
- While still in its infancy, the Blue Economy is fast becoming a reality for investors, institutions and citizens alike. Early successes like the Seychelles' debt restructuring demonstrate investors' appetite as well as the need for such projects to be financed and supported broadly by the finance community.
- The 14 Blue Finance Principles that have already been unveiled are a welcome step in the codification of these instruments. Such support from political and non-governmental bodies alike shall serve as catalyst for further development.
- Blue Finance will certainly take its place alongside Green Finance, and will undoubtedly follow the steps of its elder sibling in its organization and codification from the industry's bodies.