Blue bonds

Latin America provides a unique proving ground for blue bonds but challenges remain.

Blue bonds are debt securities issued to raise capital specifically to finance the implementation of the UN’s sustainable development goals related to the oceans and the seas. Like green bonds, blue bonds are instruments issued both by governments and development banks.

Latin America, with 70,000km of coastline and 23 island nations dependent on the ocean for economic prosperity, is the perfect test bed for this emerging asset class. According to a promoter of blue bonds in Latin America, “According to a recent survey, 72% of investors classified the sustainable ocean economy as investable, so there is definitely interest. The issue is that in emerging markets companies need to have a pipeline attractive and big enough for investors with the same quality, independent valuation, etc as for green bonds.”

“Emerging market companies need to have a pipeline [of Blue bonds] attractive and big enough for investors with the same quality, independent valuation, etc as for green bonds.”

Sustainable bond promoter, Latin America

At present, blue bonds are considered to be in the same position in which green bonds were a decade ago. In terms of activity, The Seychelles issued the world’s first blue bonds through a private placement amounting to USD 15 million in 2018. It was followed by a USD 234 million issue by the Nordic Investment Bank and a USD 450 million issue from Industrial Bank Co.’s Hong Kong branch. However, the global figure for blue bonds in 2021 is still unclear.

Blue bonds are not regulated by a set of principles from a body like the International Capital Markets Association (“ICMA”). Nevertheless, the current green and sustainable bonds frameworks include a blue market which allows issuers to signal sustainability strategies seeking to advance sustainable ocean initiatives. Second party opinions also offer investors further insights into the sustainability aspects of the bonds.

At least, that’s what the issuers tell you, in fact, much like green bonds, there is a complete lack of independent audit, there is far too much ‘marking your own homework’ and a whole industry of ‘independent’ sustainability assessors has cropped up to write reports that amount to nothing more than ‘the issuer says it is sustainable so we conclude they are sustainable’. A promoter of sustainable bonds in Latin America admitted, “Companies are still figuring out how to report. In the future we expect to see independent evaluations but if you think of the average company that is issuing a new blue bond, independent monitoring is probably too costly.”

“If you think of the average company that is issuing a new blue bond, independent monitoring is probably too costly.”

Sustainable bond promoter, Latin America

Relying on the issuer to report its own sustainability performance with no independent verification seems like a bad idea to us, even if they are using a combination of their own ESG frameworks and international standards. Companies are proud of their financial integrity and health & safety record and wear their audits and certificates as badges of honour, why should sustainability be any different?

 

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