A deep dive into investing in the blue economy

2020 was set to be the “ocean super year”: the year blue-economy investing really took off, with conferences and summits scheduled to occur around the world, and the first round of the UN’s Life Below Water targets reaching their deadline.

But, while COVID-19 provided oceans with a rare chance to breathe as global trade and tourism slowed, efforts on its conservation and protection ground to a halt. On top of that, single-use plastic and protective equipment related to the pandemic has poured into the sea at record levels, and the plunge in oil prices this year means the cheap plastic is likely to keep on coming. It seems unlikely now that many of the Life Below Water targets will be met by the end of the year.

So, as we head towards 2021 – the start of the UN’s ‘Decade of Ocean Science for Sustainable Development’ – there is increasing pressure on investors to play their role in catching up on the targets of SDG14: to conserve and sustainably use the oceans, seas and marine resources for sustainable development.

“Ocean sustainability was a hard sell for many years,” says Louise Heaps, Head of Blue Economy at WWF. Indeed, a study by RI and Credit Suisse earlier this year showed that three quarters of investors had not assessed the impact of their portfolios on the ocean, with 21% completely unaware of ocean-related investment risk. “It was largely considered to be out of sight out of mind, and so large that it could withstand the pressures placed on it, but scientists, society and business are increasingly aware of the significant and serious impacts of climate change, pollution and overexploitation on ocean ecosystems and the goods and services they provide”, adds Heaps.

And that awareness is beginning to show is asset allocation decisions. Last December, Circulate Capital raised $106m from corporations including Procter & Gamble, Danone and Unilever to support companies committed to curbing leakage of plastic waste into oceans in South and Southeast Asia. Its Circulate Capital Ocean Fund invested $6m in plastic recycling companies in India and Indonesia, for example, and is preparing to make another five or six investments across the region. 

“By the end of the year we hope to have committed more than 30% of our fund to waste and recycling and circular economy entrepreneurs across South and Southeast Asia,” explains CEO Rob Kaplan. He says that, having played second fiddle to land for many years, “the topic of the blue economy has continued to gain prominence, and more and more investment products and transactions have started to be announced”. 

“I think institutional investors are starting to recognise how the blue economy can create massive opportunities for financial returns but also environmental impact.” 

The ocean economy is expected to grow at twice the rate of the broader economy by 2030, and the economic value of global ocean assets is already estimated to surpass $24trn, making the oceans the seventh-largest economy by GDP in the world.

Another fund looking to make an impact on SDG14 is the Global Fund for Coral Reefs –  a blended finance collaboration between BNP Paribas, Althelia Funds, the Paul G. Allen Family Foundation, Prince Albert II of Monaco Foundation and a number of UN bodies, aiming to invest in coral reef conservation and restoration. Launched in September, in the next decade it wants to raise $500m through two vehicles: a Grant Window managed by UN partners, and an Investment Window managed by BNP Paribas and supported by Althelia, which will invest to scale-up the projects incubated by the Grant Window. Guarantees and concessional loans from the UN’s Green Climate Fund and other sources will be used to de-risk investments in the unfamiliar markets of the blue economy and attract private capital. 

Tenke Zoltani, founder of BetterFinance and advisor to the fund, says the blended finance structure “is really in vogue”, because it allows the public sector to leverage private finance for crucial new investment areas like oceans, as well as offering responsible investors a chance to explore new themes in less risky ways than might otherwise be available. 

One of the biggest success stories in ocean investing so far has been a $21.6m sovereign debt restructuring deal in the Seychelles. Structured by NatureVest, the investment unit of the charity The Nature Conservancy, the deal raised $15.2m in impact capital loans and $5m in charitable grants to buy back $21.6m of the Seychelles’ sovereign debt from creditors in 2016. Under the renegotiated terms, the government was required to take marine conservation and climate adaptation measures. Those commitments have now been met, with almost a third of the Seychelles’ ocean now designated as ‘protected’. Rob Weary, Deputy Managing Director of Blue Bonds at Naturevest, told RI back in March that it was working on 20 similar deals – from a $500m deal in Africa to a $200m transaction in the Caribbean. Link:

And ‘blue bonds’ are also tipped to take off. A subcategory of green bonds, transactions require the issuer to spend proceeds on projects or business activities that support the blue economy, and report on spending and impact. A report from think-tank Planet Tracker this summer claimed that such instruments could finance a recovery in the ocean’s fish stocks by 2040, saying the asset class could be bolstered by regulatory moves such as a recent decision from the European Commission to implement a management plan for fish stocks in the Western Mediterranean.

“The interest in blue bonds has really accelerated,” says Zoltani. Like green bonds or SDG-linked bonds, “they provide a pretty flexible structure with a really wide application that the capital markets understand. They’re good for private and institutional investors, and they suit pension funds.” 

The nature of investing in the blue economy means that most of the blue bonds currently under discussion are sovereign issuances. “Governments are trying to get their head around how they can issue these and they're turning to the UN for help because they're not really comfortable yet in putting together such a structure on their own,” observes Zoltani. 

One such country is Mauritius. The island nation hit headlines in July when a Japanese ship ran aground on its shores, spilling more than 1,000 tonnes of fuel into its seas. The Government is now working with the UN in a bid to issue $150m of green bonds over the next five years to help recover from the disaster. 

But it’s not just specialist financial instruments that are being developed to support SDG14: investors are also mobilising to create clearer standards and expectations in their mainstream activities too. 

In 2018, investors including Aviva, Althelia Ecosphere, the World Bank and BPCE Group got behind a new set of Sustainable Blue Finance Principles, created by the European Investment Bank, WWF and the Prince of Wales’s International Sustainability Unit. The 14 principles seek to guide public and private sector financing of the ocean economy in alignment with SDG14. They include expectations around transparency and around having a positive impact on the oceans, not just avoiding harm.

WWF’s Heaps says that, whilst the principles are voluntary, “widespread adoption will help to ensure that mainstream financial flows are being directed in the right way – fundamental to the delivery of the SDGs and a sustainable blue economy”.

The principles are now part of a broader Sustainable Blue Economy Finance Initiative, launched by the UN’s environmental finance arm, UNEP FI, which aims to coordinate investors, financial institutions, scientists, corporations and civil society to share best practices, practical tools and resources. WWF is supporting the development of sector-specific guidance as part of the initiative, concentrating on five key sectors: seafood, tourism, ports, marine renewable energy, and shipping.

On the latter, work is already being done by some of the world’s largest asset owners. RI recently reported on engagement (and in some instances divestment) being done by Norwegian pension fund KLP with companies in Bangladesh, Pakistan, and India, in order to combat the problem of ‘beaching’ – when ships are sold to scrap dealers at their end of their useful lifetimes, and taken to South Asian beaches to be broken up in ways that commonly result in significant environmental and social damage.  

There is also the Poseidon Principles, launched in June 2019 as a framework to assess and disclose the climate impacts of financial institutions’ shipping portfolios. The initiative’s signatories represent over $150bn in loans to international shipping – more than a third of the global shipping finance portfolio – and include BNP Paribas, Sumitomo Mitsui Trust Bank, Citi, Credit Suisse, ING and Nordea.

While frameworks like Sustainable Blue Finance Principles and the Poseidon Principles focus on setting expectations for investors, there are major moves to define sustainable blue investment for the first time. Definitions of the blue economy have historically been vague, and according to some, have included offshore oil rigs and other infrastructure that would not be considered environmentally sustainable. This may be about to change, in Europe at least, where regulators are planning to pin down more exact definitions of a sustainable blue economy through the new EU Taxonomy. 

Until now, the taxonomy has focused on climate change mitigation and adaptation, but will now turn its attention to four other environmental objectives, including the sustainable use and protection of water and marine resources. 

A group of 57 experts was recently appointed to help the European Commission develop details on which business activities are credibly supportive of the blue economy (as well as the circular economy, biodiversity and pollution control) in a bid to guide investment into the right areas and stop greenwashing. That group, known as the Platform on Sustainable Finance, meets for the first time today. 

But even with this growing infrastructure around blue finance, from investment products to principles and definitions, Kaplan says the most crucial change needed is investor mentality. 

“The biggest barrier is that it takes time to demonstrate that the blue economy is really a competitive investment segment,” he says. “Most investors are waiting on the sidelines, and the biggest challenge we face is trying to convince them to take on that risk which is holding them back.”