The Economics of Blue Bonds

Oceans account for over 70% of the surface area of the earth. This makes them important for life as well as for commerce. More than 90% of the international cargo around the world passes through water. Also, millions of people depend upon the ocean for their livelihood. Tourism and fishing and many other such occupations are related to the ocean. For instance, oceans produce more than 50% of the air in the world. This is the reason that windmills are generally placed near the coastline. Hence, oceans are essential for wind energy as well. It is estimated that oceans alone produce an annual GDP of over $1.5 trillion per annum. This means if the oceans were a nation by itself, they would be the seventh largest economy in the world!

However, the menace of pollution hasn’t spared the ocean either. As a result of pollution and other human activities, it is estimated that close to 50% of the coral reefs have been impacted. These reefs are obviously very important to the biodiversity of the ocean. They are important resources for tourism and also about a quarter of marine life needs them for survival.

Protecting the ocean from pollution damage is very important. However, it also requires a huge amount of money. This is the reason why a special mechanism of funding called blue bonds has been created.

In this article, we will understand what blue bonds are and why they are important.

What are Blue Bonds?

The concept of blue bonds has been taken from the concept of green bonds. Just like green bonds, blue bonds are also debt instruments which are issued by national governments or development banks. The money raised from these bonds is used to undertake activities which help preserve and enhance marine resources. The idea is to raise funds which will exclusively be used for the betterment of marine resources.

The number of blue bonds being an issue is increasing considerably. The fact that Morgan Stanley was able to sell $150 billion worth of blue bonds is a testament to their rising popularity.

How are Blue Bonds Issued?

The main objective of issuing blue bonds is to reduce the cost of capital for impact investors. This is done with the help of many international organizations. For instance, the World Bank is known to provide a free credit guarantee to the buyers of the blue bond. This means that if the issuing party is unable to repay the funds that they have borrowed, then the World Bank will repay the loan. Since the World Bank is an institution with virtually unlimited funding, this guarantee significantly reduces the risk of investors. As a result, even the meager return offered by blue bonds seems significant. Countries all over the world use credit guarantees and concessional loans in order to increase the returns for their investors.

Blue Bonds and Developing Nations

Blue bonds are good for developing nations as well. This is because Africa has the largest shoreline in the world. The shoreline stretches for over 47000 kms. Occupations like fisheries and aquaculture account for over $25 billion in GDP every year. Also, close to 13 million people are employed. Blue bonds are being used to ensure that the ocean and related occupations remain sustainable. This will ensure that there is adequate food in the African continent and also that the people of Africa are gainfully employed.

How are the Proceeds of Blue Bonds Used?

Since the oceans are not affected any single industry, it is difficult to zero down on the source of pollution. This makes it imperative to spend the proceeds of blue bonds on a wide range of ecologically sensitive projects. For instance, the port infrastructure around the world needs to be modernized in an ocean-friendly manner. There is also a need to manage better wastewater and solid waste which is often dumped into the ocean. Pollution caused by fertilizers and industrial chemicals also needs to be reduced drastically.

Challenges Faced by Blue Bonds

The financial aid taken during the building of a project eventually needs to be returned. The problem with blue bonds is that the projects are not self-sustainable. Projects are able to generate money if they levy charges on a beneficiary. This beneficiary could be either someone who benefits from the project or the polluter whose work the government is doing. In the case of ocean-related projects, identifying both beneficiaries as well as polluters is difficult. This is because of the vast nature of the oceans and the remote locations where the pollution actually takes place. Also, a lot of times the beneficiary identified is a government agency. Hence there is a limit to how much of taxpayer money can be given out to clean the ocean. In the world of politics, the sustainability of oceans is still not considered to be a big issue.

Blue bonds will, therefore, have to come up with a revenue model where they rely less on government aid and more on the money generated by the project itself. They are, however, a great way to impact investors, non-governmental agencies, and supra-national financial bodies to raise finance given the current constraints.