Can blue bonds hold water in the sustainable debt market?

It’s only been a month since Azerbaijan was confirmed as the host of November’s COP29 summit, but its preparations are already courting controversy. On Friday, it abruptly announced the addition of 12 women to its organising committee — having drawn criticism for its earlier 28-strong, all-male line-up.

We’ll keep you updated on the build-up to COP29, and its implications for business and finance, throughout the coming months. Meanwhile, we take a look at a new effort to kick-start a watery corner of the sustainable debt market.

sustainable debt

IFC and T Rowe Price dive into blue bonds

Water may cover most of the earth’s surface, but it has been occupying a rather marginal position in the world of sustainable finance. While bonds targeted at green and sustainable investment have taken off over the past decade, blue bonds — focused on water and the marine environment — have accounted for a tiny fraction of that activity.

Now, one of the world’s most important development finance institutions has teamed up with one of the biggest global asset managers to try to change that.

The International Finance Corporation, the private sector-focused arm of the World Bank Group, and US-based asset manager T Rowe Price are collaborating on a new fund to invest in blue bonds issued by companies in developing nations. The idea is to support profitable investment that aligns with water-related sustainability goals — from aquaculture companies investing in fish farms that make more efficient use of water, to utility companies extending water pipelines to underserved communities.

The IFC and T Rowe Price have each committed $75mn in seed capital to the fund and are looking to raise a further $350mn from other investors ahead of a planned launch towards the end of this year.

“No one disagrees on the value of clean water,” Samy Muaddi, T Rowe Price’s head of emerging market fixed income investing, told me. “Yet sometimes it feels easier to fund Mars exploration than to clean up water here on our own rock.”

How blue bonds have evolved

The first blue bond was issued in 2018 by the Seychelles, which raised $15mn to fund work including the expansion of marine protected areas and improved fisheries governance. Since then, total blue bond issuance had amounted to $6.8bn, said Sustainable Fitch analyst William Attwell, citing research by Environmental Finance Data. Considering that total issuance of green, social, sustainable and sustainability-linked (GSSS) bonds added up to $4.6tn, he said, this looked like “a drop in the ocean, if you’ll excuse the pun”.

The small size of this market hasn’t protected it from controversy. Gabon’s $500mn “blue bond” issued last year to refinance existing debt was criticised because only a part of the proceeds was ringfenced for marine conservation. The Nature Conservancy, a non-profit organisation, which facilitated that transaction and others for Belize, Barbados and the Seychelles, has since said it will no longer use the “blue bond” label for such deals.

The new fund from the IFC and T Rowe Price will invest only in blue bonds for which all the proceeds are earmarked for investment to support two water-related UN Sustainable Development Goals: on universal access to water and sanitation, and on conserving oceans, seas and marine resources. “It’s really important that the first few transactions that we originate for this are of that really high standard and high credibility,” Muaddi said.

The fund’s founders are hoping to capitalise on the increased attention water-related issues have received over the past year. Last year, the UN held its first global water conference for 46 years, which yielded a commitment from hundreds of governments and businesses on better water stewardship. Separately, in the UN High Seas Treaty adopted in June, nations agreed to protect 30 per cent of international waters by 2030.

And while last year’s $4bn of blue bond issuance was a small fraction of the GSSS bond market, it still easily exceeded the blue bond issuance of all previous years combined.

But this market has so far been dominated by sovereign issuers, with a $100mn blue bond last year from Danish energy company Ørsted a rare example of corporate issuance. The new fund’s focus on corporate blue bonds would help to address this imbalance, without adding to the heavy sovereign debt burden dogging many developing nations, Muaddi said.

The fund will seek commercial returns, without concessional financing, said Tomasz Telma, global head of the IFC’s financial institutions group. “We’re certainly hoping that this is going to become, in its own right, a commercially sustainable and attractive strategy,” he added.

What counts as ‘blue’?

Attwell, of Sustainable Fitch, expects further growth in the blue bond market this year, helped by the emergence of clear standards for the space. The International Capital Markets Association in September issued its first guidelines for blue bonds, which it is treating as a subset of the larger green bond market, rather than a new asset class in its own right.

“Our obsession is to avoid a situation where we reverse the progress we’ve made around the consolidation of these labels, and of the market,” said Nicholas Pfaff, ICMA’s head of sustainable finance.

ICMA’s guidelines — produced in partnership with multilateral financial institutions, including the IFC — made clear that all blue bond proceeds should be used for blue purposes, in contrast with the Gabon issuance mentioned above.

They also clearly characterised those blue purposes as being primarily about “the sustainable use of maritime resources”. This seems to sit awkwardly with the mandate of the new IFC and T Rowe Price blue bond fund, which also has access to clean water and sanitation as a priority. (Pfaff said this need not be a problem in ICMA’s eyes, provided all the bonds adhered to its overarching green bond principles.)

Uncertainty over the focus of this young asset class should ease if it takes off. The larger question is whether that will happen. Matt Lawton, a T Rowe Price portfolio manager working on the blue bond fund, noted that the green bond market also took time to find its feet, before gaining critical momentum after the 2015 Paris climate summit.

“I can tell you from my conversations with, with other peer investors, with underwriters, and with prospective clients . . . the blue bond market today is at that tipping point,” Lawton said. The test of that analysis will be whether this new fund can raise the capital it is seeking — and then put it to effective use against the world’s worsening water challenges.

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