Blue finance could make a meaningful contribution to the SDGs

Blue bonds could cover 10% of the funding needed for SDG14 – which is partly focused on protecting life in the oceans – by 2030, according to a report by SystemIQ. Blue finance has received far less attention than green finance, the broader category of finance of which it is often considered a subset, but has grown meaningfully since the first blue bond was issued in 2018 by the government of Seychelles.

Blue bonds are the labelled bond element of blue finance, which can also be provided through blue loans or sustainability-linked loans and financing. The blue bond market is divided between similar types of instruments, as with green bonds, with labelled blue use-of-proceeds bonds and sustainability-linked bonds.

Blue finance has also been a common approach in the debt-for-nature swap, where sustainability-focused investors or multilaterals help lower-rated sovereigns refinance debt into labelled ‘blue’ issuance. This is where the savings from lower rates or purchasing debt trading at a discount will be committed to marine conservation efforts.

The report outlines the development and prospects for blue finance in two regions – the Middle East, North Africa and Türkiye (MENAT) and the Asia-Pacific (APAC) – where the immediate development is expected to be strongest. The market for use-of-proceeds blue bonds has been dominated by Asia, which accounts for 62% of issuance, followed by Latin America and the Caribbean. Europe, which accounts for a sizeable position of the green bond market, represents just 13% of blue issuance.

Among the regions in focus in the report, MENAT is notable because it has not seen any issued blue bonds to date, although Egypt is expected to follow a previous green bond issuance with a debut blue bond. There are many promising types of blue finance that could be used across the MENAT region. This is a key part of the global shipping market, including within it the Suez Canal in Egypt and the Jebel Ali port in the UAE (one of the world’s dozen largest ports by volume).

Shipping and ports are key parts of the blue economy, with a need for decarbonizing shipping and investment in ports that are able to store, transport and be powered by clean fuels. Like shipping, other parts of the blue economy depend on a healthy relationship between what happens on land and in rivers and in oceans. Pollution from plastics and release of other forms of pollutants such as pesticides and pharmaceuticals on land can end up in waterways, seas and oceans and impact biodiversity and ocean health.

Meanwhile, the sea level rise from climate change will produce huge needs for adaptation of ports and coastal communities including tourist resorts. Real estate, including property in low-lying coastal areas, often represents a significant share of financing from banks. Degradation of coastal areas such as mangrove forests produces additional vulnerabilities for banks for either longer-term sea level rise risks or more immediate impacts from flooding and storms that are accentuated by climate change and can be worsened by even low levels of sea level rise.

Beyond the physical risks associated with climate change, there will also be risks connected to the “transition away from fossil fuels” – a key conclusion of COP 28. The transition won’t be entirely away from all fossil fuel-related infrastructure, including in development of offshore wind and hubs for wind servicing.

The Middle East is home to 29% of global offshore oil rigs, while SystemIQ cites estimates from the IEA that “1/3 of the operation, maintenance and service costs of offshore winds offer efficiencies with the hydrocarbon supply chain”, providing a clear transition opportunity. The IEA separately estimates that the ocean has the potential to generate 20 times the total power compared to global electricity consumption in 2020.

Notably missing from the list produced above is the fishing industry, which is often front-and-center in discussions of the blue economy and blue finance. This industry and related aquaculture production is impacted by and impacts other issues in the blue economy. It can be responsible for pollution such as discarded nets, damage to ecosystems from overfishing, and some fishing practices that impact biodiversity and the ocean floor. The ability to continue to fish sustainably relies on healthy ecosystems, and is negatively impacted by land-based pollution including microplastics that end up in oceans and fish or noise pollution from ships.

The reason that fishing is listed last isn’t due to its relative importance, but to the relative perception of the blue economy. One of the factors surely slowing down acceptance of blue finance as a distinct element within green finance is a perception that blue finance is about fishing and conservation, which are viewed as either too small or uninvestable for most financial institutions to consider.

There are challenges in linking together the co-benefits from investing sustainably in one sector of the blue economy with other investments in other ocean-related sectors, but a lot of opportunities as well. Seeing a focus placed on opportunities for blue bonds and other forms of blue finance across the MENAT region and Asia – which includes many OIC countries – should be a call to action to consider blue finance among other developing approaches to responsible finance by financial institutions within these markets.

The RFI Foundation is involved in coordinating an “Oceans Flagship Laboratory” announced during COP 28 which is a part of the BC100+ initiative focusing on blockchain and the SDGs. The Oceans Flagship Laboratory is working to explore the role of technology to increase flows of blue finance, particularly within the MENAT region.