Amid growing calls for a big increase in finance for ocean protection, blue bonds have emerged as a potentially crucial means of mobilising capital. Here is what you need to know about this nascent asset class.

What are blue bonds?

Blue bonds are much like conventional bonds — interest-bearing debt instruments — but the issuer is required to use the proceeds for projects that directly benefit the health of the ocean and marine ecosystems. This can cover projects from sustainable fishing to coral reef restoration, cleaner shipping practices and eco-friendly tourism.

Since the first blue bond issuance by the Seychelles in 2018, the market has grown, albeit modestly. Last year, blue bonds worth $2.5bn were issued, according to data provider ICE — a 10.6 per cent annual increase. But this represented less than 0.5 per cent of the issuance of green bonds, which raise funds for a wider range of environmentally-friendly purposes.

Who has been issuing blue bonds?

Blue bond issuance has yet to catch on among governments. After the Seychelles issuance, which financed the expansion of protected marine areas, the only sovereign issuer to follow suit was Indonesia, which raised $150mn in 2023. It used the proceeds for purposes including coastal restoration.

Multilateral financial institutions have issued about $2bn worth of blue bonds to date, according to S&P Global Ratings. The World Bank Group and the Inter-American Development Bank have both issued a series of the instruments, using the proceeds to finance ocean-friendly projects.

But private-sector companies have emerged as the most active issuers of blue bonds, raising roughly $9bn to date, says S&P. More than $3bn of that has been by banks, mainly in Asia. Institutions such as Bank of China, BDO Unibank of the Philippines and Thailand’s Bank of Ayudhya have issued bonds to finance projects by clients.

Non-financial companies connected with the sea have also been tapping the blue bond market, notably last year. Danish offshore wind company Ørsted raised €100mn to finance projects that protect marine ecosystems and reduce pollution from shipping. Dubai-based port operator DP World raised $100mn to tackle the environmental impact of its ports and the ships that use them. Japanese shipping group Mitsui OSK Lines raised ¥20bn ($139mn) for similar purposes.

Are blue bonds the only source of finance for the oceans?

No. Others worth tracking include debt-for-nature swaps, designed to tackle the twin crises of developing nations’ overindebtedness and of environmental degradation at the same time. Creditors refinance a sovereign borrower’s debt on improved terms, and the debtor government agrees to use all or part of the interest savings for conservation.

The approach has been applied sporadically since the 1980s, but has gained momentum in recent years, with a focus on water and oceans. Last year, El Salvador refinanced $1bn of bonds in a debt-for-nature swap that is expected to raise $350mn for river conservation. In January, Indonesia completed a debt swap that will enable $35mn of investment in coral reefs. Belize, Barbados, Gabon, the Bahamas and Ecuador have all carried out debt-for-nature swaps for ocean protection.

Sustainability-linked bonds are another instrument with marine potential, which has been little exploited. Unlike blue or green bonds, the proceeds are not earmarked for a specific purpose. Instead, the issuer agrees to pay a higher interest rate if it does not meet specified targets.

The only ocean-focused SLB so far was a $151mn issuance in 2021 by seafood company Thai Union. Its interest costs were linked to targets in areas such as monitoring of its fishing practices.

What is the outlook for the market?

Investors in blue bonds so far are a diverse group, ranging from pension funds and life insurers to development finance institutions and philanthropic foundations. Investment funds dedicated to this asset class, however, have struggled to gain traction.

Asset manager T Rowe Price announced in 2023 that it was launching a fund with the World Bank Group’s International Finance Corporation. The two institutions each pledged $75mn to the fund and sought $350mn from external investors ahead of a planned launch at the end of 2024. But investors have been slow to materialise, and the fund is “in the capital-raising phase” with a view to launching some time this year, a spokesperson says.

Fidelity International launched its Blue Transition Fund last October with an initial $20mn of its own capital. As well as blue bonds, this fund will invest in debt issued by companies deemed to be contributing to sustainable ocean management. The firm said it received the first external investment in the fund in May, without giving further details. It said it was seeing particular interest from European insurers “increasingly looking to align fixed income allocations with blue and broader climate transition-related outcomes”.

Analysts at consultancy Systemiq say the blue bond market’s growth should benefit from the development of standards — notably a framework for the asset class published by the International Capital Market Association in late 2023. National ocean plans and better available data should also help, the researchers say. If the market can expand at the pace seen in the older green bond sector, it would hit $14bn in annual issuance by 2030, they add, but even that would provide less than a 10th of the estimated funding needed to meet the UN’s 14th sustainable development goal of safeguarding the health of seas and oceans.