Indian blue bond mining provision draws market scepticism

Standard setters, external reviewers and a prominent investor have raised concerns over a provisional blue bond standard tabled by the Indian securities regulator.

Documents published by the Securities and Exchange Board of India (SEBI) earlier this month revealed that issuers of blue bonds would be able to finance “oceanic resource mining” activities for nickel, copper, cobalt and manganese if the proposals are taken forward. The metals are critical components in the manufacture of batteries, electric vehicles and other sectors associated with the energy transition.

Only a handful of blue bonds have been issued in recent years, following the launch of a pioneering $15 million bond by the Seychelles in 2018 to fund fisheries projects. Since then, demand for blue bonds has outstripped supply, in part due to the lack of standardised guidelines, which has resulted in a “a bit of a wild west where everyone can just do whatever they want”, according to the UN Environment Programme Finance Initiative (UNEP-FI).

But even with this uncertainty, it is unlikely that the majority of blue bond investors will back mining as an acceptable use of proceeds, says Stephen Liberatore, ESG head of fixed income at trillion-dollar asset manager Nuveen.

“Just because something is called a blue bond, it may still end up funding activities you would not expect. Extractive industries such as mining is something that I know our investor base would not be supportive of and I believe that the vast majority of investors who are looking to invest in these types of securities would also not be supportive.

“I think the proposals reinforce the need for investors to understand and evaluate every ESG bond they are considering. However, the other blue bond-eligible activities proposed by SEBI such as coral regeneration and sustainable fishing naturally make a lot of sense, and we have seen a lot of investor interest in those types of projects.”

Liberatore, who was involved in the drafting of the Green Bond Principles and currently serves on its advisory council, added that blue bond issuers should consider allocating proceeds to pollution prevention and control, particularly in developing countries with a history of dumping sewage and waste in the ocean.

Sean Kidney, CEO of the Climate Bonds Initiative, noted the importance of critical minerals to the green transition but warned that strict science-based guidelines had to be in place before the proposed blue bond standard would attract international buyers.

“If mining is to be a sustainable activity, it is essential that there are strong protections for the natural environment which go beyond the high-level guidance currently put forward by SEBI. The problem with sea mining is that much of it takes place in areas we know very little about; it’s a bit like poking a stick in a dark hole, and this is not good enough.”

This was echoed by Sustainalytics, a prominent external reviewer for sustainable debt including blue bonds, which described the SEBI proposals as “premature”.

“Knowing that deep ocean is one of the planet’s least understood and explored ecosystems, along with its high biodiversity and carbon sink potential, we believe it is premature to consider any polymetallic mining activity in such ecosystems as ‘green/blue’ without recognised standards and guidance from global/regional scientific communities,” a spokesperson from the organisation said.

ICMA has also confirmed that ocean mining will also not be included in a list of credible blue economy projects that will be at the heart of an upcoming guide for blue bond investors it is developing with UN Global Compact, International Finance Corporation, the Asian Development Bank and UNEP-FI. It is due to be published in Q4 2022.

Simone Utermarck, sustainable finance director at ICMA, said the resource would provide practical guidance “on using sustainable bonds to access financing for projects and strategies that advance ocean health and the sustainable blue economy.

“The blue finance paper explicitly states that the sustainable blue economy excludes non-renewable extractive industries such as offshore oil and gas, and deep-sea mining.”

SEBI was contacted for comment but did not respond. Mining activities are not included within the scope of a separate green bond standard also being proposed by SEBI.