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Comment: Will 2020 be the year of blue finance?

James Richens, Editor of The World Ocean Initiative, takes stock of Responsible Investor’s survey of investment risks and opportunities in the blue economy.

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The year 2020 will be crucial for the sustainable development of the ocean. Some are calling it the “ocean super year” due to its packed agenda including the World Ocean Summit, the UN Ocean Summit, Our Ocean in Palau, the conference on the Convention on Biological Diversity and COP26 in Glasgow, UK.

There has been an awakening of interest in the ocean, especially the risks it faces from plastic pollution, loss of coral reefs and extreme weather due to climate change. This culminated in the COP25 climate talks in December 2019, which made progress on integrating ocean issues into the global climate effort (although the conference overall was rightly seen as a failure in terms of generating greater ambition among countries to cut carbon emissions).

Ocean of opportunity

What is less widely recognised is the important contribution that ocean-based industries can make to cutting carbon emissions, helping local communities adapt to the effects of climate change, and providing employment in a sustainable “blue economy”.

Analysis by the High Level Panel for a Sustainable Ocean Economy found that solutions including offshore renewables, shipping, ecosystem restoration, fisheries and aquaculture, and seabed carbon storage could save more than 11bn tonnes of carbon by 2050—equivalent to the emissions from all of the world’s coal-fired power stations. They could contribute up to 21% of the reductions needed to close the gap between current emission levels and where the world needs to be to limit global warming to 1.5℃.

Responsible Investor’s survey into investors and the sustainable blue economy is therefore very timely. Institutional investors have a crucial role in protecting ocean health and channeling the huge amount of finance needed to make ocean solutions a reality.

That is why the survey’s key findings are so alarming: three-quarters of investors have not assessed the impact of their investment portfolios on ocean sustainability, and a fifth are completely unaware of ocean-related risks to the value of their investments.

Value at risk

Investors face substantial financial and reputational risks from ocean-related sustainability challenges. For example, shareholder value in fisheries and aquaculture companies is threatened by overfishing and other environmental impacts. With almost all global fish stocks fully exploited or overexploited, increasing competition and climate change threatens to  drive dramatic declines in fish catches, resulting in revenue losses and increased operating costs. Shrimp farming in Asia which contributes to mangrove deforestation faces tighter regulatory and supply-chain controls. Salmon farms in countries such as Norway and the UK face production losses from disease and parasites.

Many investors have made progress in assessing and reducing the climate-related risks in their portfolios, encouraged by initiatives such as the Task Force on Climate-related Financial Disclosure and the Portfolio Decarbonisation Coalition. Investors need to extend this type of analysis to ocean-related risks and make clear commitments to end financing of activities that damage the ocean environment.

The good news is that nine out of ten institutional investors are interested in financing the sustainable ocean economy, although blue finance is at present largely confined to the niche of impact investing. The survey also identified activity among venture capitalists supporting start-ups developing clean ocean technologies.

Breaking down barriers

Several barriers need to be overcome before blue finance can become mainstream, the survey found. One of these is uncertainty over what business activities are part of a genuinely sustainable blue economy. Most investors included aquaculture, renewable energy, fisheries, waste management, biotechnology and tourism in the blue economy, but they questioned whether deep-sea mining, and oil and gas should be included.

In fact, most ocean-based sectors have sustainability challenges which they need to overcome before they can be considered part of the blue economy. Deep-sea mining could supply metals needed by the low-carbon economy at a much lower environmental impact than land-based mining. The oil and gas sector could play an important role in carbon storage, helping undo some of the damage it has done to the Earth’s climate. Developing standards, guidelines and a taxonomy of genuinely sustainable blue-economy project types would improve investors’ understanding and confidence.

The investment case for financing low-carbon shipping is clear. Shipping’s carbon emissions are being driven upwards by increasing demand for international freight, yet the sector is committed to at least halving its impact by 2050. Banks representing 20% of global shipping finance are stepping up action to finance ship decarbonisation through the Poseidon Principles, including Citi, Société Générale and DNB.

Call for innovation

In contrast, financing ecosystem restoration is more challenging. Protecting mangrove forests, coral reefs and seagrass meadows have many economic, environmental and social benefits including carbon sequestration, flood and storm protection for local communities, and providing livelihoods for local people through sustainable fishing. Existing accounting systems do not capture the true value of these benefits. Ecosystem restoration projects are typically small-scale and do not provide the sort of returns that conventional investments deliver.

Innovative financial products such as blended finance, in which public and private partners pool funds in order to spread investment risk, could fill this funding gap. Debt financing is also seen as offering investment opportunities, as the Seychelles demonstrated with its blue bond. The greater use of natural capital valuation to value ecosystem services could build a more robust investment case. These approaches can be used to finance marine protected areas which generate returns by replenishing local fisheries and increasing tourism.

These innovations are a great start, but clearly more is needed to fund the transition to a sustainable blue economy. The prospects for 2020 look good with the ocean super year looking certain to drive demand for blue finance opportunities. The World Ocean Summit in Tokyo in March will provide a great platform to discuss opportunities for sustainable investment in ports, tourism, shipping, coastal infrastructure and other key sectors of the blue economy.

 

James Richens is Editor of the World Ocean Initiative. He has previously worked for The ENDS Report, Trucost and The Confederation of British Industry.

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