8 minute read
Blue economy
How finance is catching the blue wave
Carolin Leeshaa examines how natural capital is a new finance context for the ocean and the blue economy
Carolin Leeshaa Head of Social and Sustainable Finance, KPMG Australia
All around the world, countries are looking to transition to a “green” economy that is low in carbon, socially inclusive and resource efficient. In its simplest form, “green” has become short for a sustainable social, environmental and economic future.
While the world’s attention has been caught by the direct terrestrial implications of the green agenda, the “blue economy” has not been prioritised to date. The “green” economy should include the sustainable use of oceanic resources, but the pivotal role of the oceans in limiting temperature rises and stimulating socioeconomic development has been comparatively absent from the transition towards a green global economy.
The “blue economy” is central to the green ecosystem: oceans influence all natural cycles and are also directly or indirectly involved with all economic sectors. Oceans produce up to 80% of the oxygen we breathe, while nearly 40% of the world’s population depend on marine and coastal biodiversity for their livelihoods. For these reasons, the “blue” component of the “green” transition to a more sustainable global economy cannot be overlooked.
In addition to being crucial for regulating the climate and weather by absorbing much of the anthropogenic global carbon dioxide as our biggest natural carbon sink, our ocean provides habitats for important species and critical marine ecosystems that are indispensable for biodiversity. Our ocean is also vital to the world’s economy. It is a source of food, energy, raw materials and jobs for millions of people. Analysis by the Organisation for Economic Co-operation and Development (OECD) projected that the global ocean economy could double in size to $3 trillion of global gross value in 2030.
Yet, our ocean is still largely treated as a public good, not as a valuable oceanic natural asset that could cease to be in supply if not properly managed. To date, existing markets do not value the flow of the many services (often called ecosystem services) the ocean provides. We have a distinct opportunity to transform our capital markets and the core operations and supply chains of the real economy in a way that recognises and internalises these externalities in investment and business decisions.
Science is telling us that the ocean’s health is under stress and depleting at an alarming rate (see the Ocean Health Index at bit.ly/3E56d6e). Sadly, ocean temperatures are warming and sea levels are rising. Ocean acidification and shifting ocean currents are leading to biodiversity and habitat loss. Unprecedented coral reef bleaching and changes in migration patterns of icon species, such as whales and salmon, as well as a higher frequency of severe ocean weather events, are all too common symptoms of the fading resilience of our ocean. Often, this is further aggravated by land-based pollution, in particular agricultural run-off, chemicals and (micro) plastics, as well as by overfishing and depleted fish stocks in many parts of the world.
The vast potential for finance to drive ocean-friendly business practices
A healthy economy depends on a healthy ocean. The manner of economic growth increasingly matters. Over 68% of global GDP is already covered by a net zero target. Some of the world’s largest companies are setting the bar even higher with restorative strategies, pledging to become “carbon negative” and “resource positive”.
Sustainable finance offers an approach to reframe what we value when we invest. Safeguarding our ocean’s health often requires significant adaptation of business practices across global supply chains. This comes with significant costs. Just as the public recognition of our ocean as a unique natural asset is growing, so do the calls for global capital markets to redirect private funding towards ocean positive outcomes. It is also a powerful lever to both public and private investors to contribute nature-based solutions toward the global decarbonisation agenda.
Whilst the market is still nascent, there is reason to be optimistic. Over the past few years, there has been a wave of “ocean-friendly” financing solutions. Whilst the ticket sizes are often still small, the variety of emerging “blue finance” models have been growing steadily. Similarly, the emergence of environmental marketbased incentive mechanisms for conservation management activities of our oceans, coastal and marine ecosystems have the potential to create an entirely new playing field and are now needed more than ever to sustain and safeguard our oceans natural ability as a blue carbon sink.
The sustainable valorisation and management of oceanic natural asset will require an even greater degree of collaboration than the green agenda across states, and between the private and public sectors. This goes beyond traditional maritime industries, to real-economy terrestrial sectors that are reliant, or impacting on our oceans through their value chains – but perhaps don’t realise it yet.
Bringing these new market-based platforms to life at the level of scale required will require strong intermediaries with convening power across sectors, deal/transaction structuring know how and the independence to verify impact integrity and instil investor confidence. Digital technologies such as artificial intelligence, big data, blockchain and geo-spatial mapping of biological ecosystems will be a key enabler to scale the next wave of “blue” financing instruments and demonstrate measurable, positive environmental outcomes to ESG investors.
A rising regulatory tide lifts all boats
The United Nations’ Sustainable Blue Economy Finance Principles are already underpinning and shaping banks, insurers and investors’ ability to better align their investment, underwriting and lending activities to mainstream sustainability of ocean-based sectors and promote the implementation of the UN Sustainable Development Goal (SDG) 14, Life Below Author bio
Carolin Leeshaa is Head of Social and Sustainable Finance, KPMG Australia and has worked in global social and sustainable finance for over 20 years.
Water. Similarly, over 20 financial institutions (representing 50% of the global ship finance portfolio) have signed up to the Poseidon Principles to integrate climate considerations into lending decisions to promote international shipping decarbonisation.
Institutional asset owners like Norway’s sovereign wealth fund have also offered specific guidance towards investee companies which sets out their expectations on ocean sustainability. The fund wants the boards of companies that depend, use or affect the oceans to work on reducing the pollution their businesses creates. With the establishment of global initiatives like the Taskforce on Nature-related Financial Disclosures (TNFD), we expect that corporations will receive significantly more scrutiny around their naturerelated risk performance from financial investors, lenders and insurance underwriters.
How finance is catching the blue wave Blue Bonds: a deeper blue for Green Bonds
Blue Bonds are an emerging subset of the well-established global $1.7 trillion Green, Social and Sustainability Bond market landscape, drawing on similar ‘use-of-proceeds’ principles. Certifiable standards and taxonomies issued by the Climate Bonds Initiative are offering relevant guidance for eligible projects in marine renewable energy and water infrastructure, specifically coastal conservation and restoration activities. Another conceptual approach frequently sees “Blue Bonds” funding earmarked for marine related activities such as sustainable fisheries and aquaculture, sustainable tourism, green shipping and ports, renewable marine energy, climate change adaptation and mitigation, waste management or coastal protection and marine conservation. On the social side, blue activities relate well to employment generation through small and medium sized finance and food security.
Debt for nature swaps
In 2018, the Seychelles issued the first sovereign Blue Bond worth $15 million to fund the implementation of a sustainable fisheries management plan to develop semi-industrial and artisanal fisheries. The World Bank provided a repayment guarantee for one third of the principal, while the UN’s Global Environmental Facility (GEF) offered a concessional loan to help cover the coupon payments. With the support of private funders, the country then converted $21.6 million of national debt under the world’s first “debt for conservation” swap aimed at ocean conservation and climate resiliency. This created the second largest marine protected area in the West Indian Ocean, alongside the development of a marine management plan and a permanent endowment to sustain climate adaptation and marine conservation activities.
Blue Natural Capital Markets: Blue Carbon
According to the Blue Carbon Initiative, carbon sequestration from coastal ecosystems like mangroves, tidal marshes and seagrass meadow projects (referred to as “blue carbon”) have the capacity to store more carbon per unit area than terrestrial forests and are beginning to be recognised as a nature based solution in the global decarbonisation agenda. Despite this potential, only a few countries currently include these ecosystems in national greenhouse gas (GHG) inventories and Nationally Determined Contributions (NDC) commitments under the Paris Agreement. Whilst there are some pilots projects taking place, standards for blue carbon have not yet been fully developed, although the recently formed International Partnership for Blue Carbon has developed guidance for international and national policy making, including the financing of blue carbon projects. Although blue carbon is still quite novel, by virtue of having the capacity to be translated into a standardised economic unit akin terrestrial carbon, it has the potential to act as the future yardstick for positive ocean outcomes in environmental markets.
Queensland Government’s Reef Credit Scheme
The Reef Credit Scheme has been developed by GreenCollar, an Australian environmental market developer and investor in partnership with landholders, the Queensland government and natural resource management organisations. It represents a very tangible and innovative market-based solution which offers a new way to improve the quality of catchment water entering the Great Barrier Reef, the world’s largest coral reef and both an Australian and international icon.
Each “reef credit” is a tradable unit representing a quantifiable volume of nutrient, pesticide and sediment prevented from entering the Great Barrier Reef catchment. The monetary value of these credits incentivises hundreds of landowners and managers such as sugar cane farmers and graziers located in Queensland’s Great Barrier Reef catchment to integrate sustainable land management practices into their existing operations, rewarding them with an additional diversified income stream.
Each “reef credit” provides a measurable, audited water quality outcome, tracked against internationally recognised targets. Private buyers include government and philanthropists, as well as private sector investors like HSBC, who is looking to utilise this nature-based solution to contribute to the financial institution’s own corporate environmental net-zero climate adaptation commitments. ●
