Managers of UK’s largest ethical sterling corporate bond fund discuss the importance and “scarcity” of blue bonds ahead of tomorrow’s World Oceans Day
While green bonds are on the right path and the blue bond market – bonds that look to raise capital to finance marine and ocean-based projects that have positive environmental, economic and climate benefits – remains thin, the Oceans Financing Initiative may mark a significant turning point, according to Rathbones’ Bryn Jones and Noelle Cazalis.
“As ethical investors, we are constantly seeking investment opportunities, and stand ready to support the ‘’blue economy, which is valued at £1.3tn, but so far these opportunities are scarce,” says Bryn Jones, lead manager on the Rathbone Ethical Bond Fund.
“We appreciate the blue bonds are an embryonic market, and they should play an important role in maintaining the biodiversity of the oceans to ensure the dynamics of the planet are kept in equilibrium. We, as bond investors, are seeking more opportunities in that space. The issue we face is that it becomes a classic chicken and egg situation – what comes first, the bond or the demand?”
Noelle Cazalis, a manager on the fund, says: “Oceans are the largest carbon sink on the planet, and since 1970 they have absorbed 90% of Earth’s additional heat. But they are under threat – in 2016 alone, almost a quarter of the world’s coral reefs disappeared due to ‘bleaching’ – a process triggered by a change in sea temperature, or a change in ocean acidification. It causes the algae living on the coral to leave, causing the coral to die, as well as having repercussions for entire ecosystems which are dependent on the coral to feed can no longer find food. As a keen scuba diver, I’ve witnessed how fragile these ecosystems are.
“Protecting marine ecosystems and promoting better fishing practices will help economies to become more resilient. Protecting coastlines and ecosystems also creates a huge social impact and can help ensure that jobs are protected, in the tourism and hospitality industries, for example. Blue bonds are one way to finance such projects.”
Blue bonds are ‘use of proceeds’ bonds. The money raised is directed to specific projects, with ‘blue’ credentials, and investors receive regular reports on what the bonds have financed.
Cazalis adds: “For example, the Seychelles blue bond issued in 2018 was used to support the expansion of marine protected areas and to improve practices in fisheries. In 2019, the Nordic Investment Bank issued a blue bond to protect and rehabilitate the Baltic Sea. You can see how these instruments are crucial in tackling the challenges raised by the UN Sustainability Development Goal 14 ‘Life Below Water’ (Conserve and sustainably use the oceans, seas and marine resources).”
At the start of the year, the Asian Development Bank and the European Investment Bank announced the Oceans Financing Initiative. By leveraging public funds, the initiative looks to create investment opportunities for the private sector, with a specific focus in Asia and the Pacific region.
Cazalis adds: “We strongly believe that development banks’ support can help this market to take off. By backing projects, they can ensure the risk-reward profile of these investments meet investors’ requirements. They can, for instance, guarantee revenue and lower investors’ risk. This risk sharing mechanism can be a huge step forward for the market, and can in turn help countries to reach their Paris Agreement targets. Looking at different geographies, Asia seems particularly vulnerable, as it has the longest coastline of any continent and produces some of the richest marine ecosystems on the planet. Australian issuers could also use the blue bond market to protect the Great Barrier Reef or the Ningaloo Reef, the latter of which could be wiped out in less than 30 years. “
Jones adds: “With more familiar green bonds, we are on the right path. The market has grown significantly over the last years, and we have been instrumental in pushing green gilts with the DMO. Blue bonds are lagging, but we’re confident this market can grow. In March 2021, the UN EP FI published new guidance to encourage the transition of key sectors towards sustainable alternatives: seafood, ports, maritime transportation, marine renewable energy and costal and marine tourism. It supports the implementation of the Sustainable Blue Economy Finance Principles, and will help build a set of standards needed for the market to gain traction. More capital is urgently needed to finance the transition, and we stand ready to look at opportunities to finance a sustainable blue economy.”
According to FE, as at 28th April, 2021, largest ethical sterling corporate bond fund by AUM.