A blue bond is a new type of sustainability bond that is issued to fund investments in healthy oceans and blue economies. Earnings from investments in sustainable blue economy projects are created in a blue bond.
What are the differences between blue and green bonds?
Bonds are a type of fixed-income investment in which investors become debtors of the entity issuing the bond. Bond investors receive a fixed interest rate (coupon) on a set schedule, and their initial investment (principal) is refunded at the bond’s maturity. Green bonds are used to fund initiatives and activities that help the environment, assisting in the transition to a low-carbon, climate-resilient, and resource-efficient global economy.
In terms of design, “blue” bonds are similar to green and other impact bonds, such as social and sustainability bonds. These bonds differ from traditional bonds in that they are issued with the commitment of using the funds obtained for specified green, climate, and sustainability reasons.
The first blue bonds (Seychelles Blue Bond, Nordic Sea Blue Bond) were issued in 2018, and more are likely in the coming years as ocean and coastal resilience finance becomes increasingly important.
The Climate Bond Initiative has developed a set of verifiable benchmarks that are applicable to the blue bond market:
https://ec.europa.eu/maritimeaffairs/sites/maritimeaffairs/files/declaration-sustainable-blue-economy-finance-principles en.pdf
What is the total number of blue bonds issued?
Belize is a small country with a population of 400,000 people and a reputation for being a safe haven “Serial defaulter” is attempting to restructure some of its debt as a so-called blue bond with ESG-related targets, while the Asian Development Bank (ADB) just issued its first blue bond to fund ocean-related projects in Asia and the Pacific last month.
These actions once again shine a light on a very new and niche area of finance, raising concerns about its risks, genuine impact, and scalability. At least six blue bonds have been issued around the world, the first of which was issued by the Seychelles government in 2018, however exact figures are difficult to come by.
Nonetheless, The Nature Conservancy, a non-profit conservation organization based in the United States, is driving what it terms a “global conservation movement.” “audacious” plan to build the market and, as a result, safeguard an additional 15% of the ocean. According to the Marine Protection Atlas, a project of the Marine Conservation Institute, just 7.8% of the ocean was covered by marine-protected areas, which are similar to underwater national parks, in April of this year, thus the plan would nearly triple the amount of protected water.
What does a brown bond entail?
Transition bonds allow companies in ‘brown’ industries (those that emit a lot of pollution) to raise money to fund the transition to more sustainable models.
Transitioning carbon-intensive industries to sustainable practices is a requirement of a comprehensive climate plan. Green bonds may entice investors, but transition bonds are the ones that will save the earth.
The market for fixed-income instruments, also known as bonds, is one piece of the financial asset puzzle that has seen a lot of innovation in recent years. And, if we are to save the world, we will need investors to fight for a specific type of security: transition bonds.
The global market for corporate bonds, which are obligations issued by firms to raise capital for business operations, is estimated to be worth $41 trillion dollars. These markets are having a reckoning today: we are confronting an oncoming climate disaster, and a new generation of asset owners – millennials, who are becoming increasingly diverse and, yes, woke – are selecting where capital flows. As a result, fixed income capital markets have had to evolve. Green bonds, a type of security created allows issuers (typically firms) to borrow money to fund ‘green’ projects including the development of environmentally friendly technologies, investments in sustainable resource management, and so on, have gotten a lot of attention. The total number of worldwide bond issuances fell by 3% in 2021. Green bond issuances, on the other hand, reached a new high.
On the surface, this appears encouraging. Is it possible for green bonds to change the debt capital markets? Will they be able to stem the stream of corporate borrowing and make it more sustainable?
Unfortunately, the answer is no. Even at their peak last year, these bonds accounted for just 1% to 2% of all issuances. It’s easy to understand why: Most businesses cannot undertake “green” projects because it is simply not feasible in their industry. Companies in traditionally carbon-intensive industries like oil and gas, manufacturing, and heavy industry will have a hard time coming up with projects that match the ‘green’ bond standard. Exxon Mobil has been sanctioned (rightfully) for concealing climate research from the public. It is to be blamed for both climate change and climate denial. We can’t make it go away, though. We are unable to dismiss its 75,000 employees. We can’t simply remove it from the debt capital markets, however.
Transition bonds have a role in this. Companies in ‘brown’ industries, such as those that generate considerable emissions, might use transition bonds to acquire funding to help them transition to more sustainable business models. For manufacturing companies, this could take the form of a bond issuance related to increased recycling, longer product lifespans, or general energy efficiency initiatives. Transition issuance might enable both industry and fossil fuel corporations acquire funds for investments in promising new technologies like carbon capture and storage. While encouraging “green” businesses is crucial, advancement in high-carbon industries must also be supported.
Unfortunately, ‘brown’ enterprises are increasingly finding it difficult to raise finance, and investor enthusiasm is waning. All businesses, including those that have been historically polluting, must be given the opportunity to develop. This is especially true in developing countries such as India. Manufacturing and heavy industry account for more than a quarter of all economic activity in the country, and if it is not made cleaner, greener, and more efficient, it could jeopardize the achievement of not just domestic, but also global environmental goals.
Approaching ‘brown’ industries with a burned-earth mentality is likely to result in, well, scorched earth. The green transformation will be slowed, not accelerated, if enterprises are deprived of finance. Of course, there are several drawbacks to this notion of transformation. Green bonds are now accredited using a standard created by the Climate Bonds Initiative (CBI), a non-profit organization. Transition bonds lack an analogous structure; without one, they risk becoming just another forum for useless corporate sustainability propaganda. When does security transform from an ordinary link to one that is tangibly aiding transition? What can we do to ensure that transition bonds aren’t just a ruse to get investors to keep doing business as usual? The 40-trillion-dollar questions are these.
However, there is reason to be optimistic. The CBI and Credit Suisse recently produced a white paper on transition bonds, and the EU’s taxonomy, which is a fundamental part of the European Green Deal, describes the stages of transition and activities that apply. These new rules must guide a new era of sustainable capital markets, and investors must show a strong desire for transition bonds to support this shift.
(The author attended Brown University in the United States and interned at EY-Parthenon and Goldman Sachs.) The opinions stated are solely those of the author.)
Bluebonds were created by which country?
10 SEPTEMBER 2021, MANILA, PHILIPPINES The Asian Development Bank (ADB) has issued the first dual-tranche blue bonds in Australian and New Zealand dollars, which will be used to fund ocean-related projects across Asia and the Pacific.
What is the purpose of blue bonds?
Our oceans are more than just a place for millions of species to live. They also produce more than half of the world’s oxygen, are a major carbon dioxide absorber, a significant source of food and pharmaceuticals, a source of employment, and are a crucial factor of environmental health. According to data from the UN International Maritime Organization, waterways are considered the primary commerce channels, with international shipping transporting more than 80% of global goods.
According to a World Wild Life report, “the annual gross marine product (GMP)equivalent to a country’s annual gross domestic outputis at least $2.5 trillion; the overall “asset” base of the ocean is at least $24 trillion.” When compared to national GDPs, the “ocean economy” ranks among the world’s top ten largest economies.
More than two-thirds of the ocean’s yearly base economic value is believed to be generated by assets that rely directly on “healthy conditions.” However, several reasons are causing the ocean’s health to deteriorate, including growing pollution levels, overexploitation of marine natural resources, eutrophication, acidification, and ocean warming. In recent years, there has also been an alarming increase in dead zones, from 400 in 2008 to 700 in 2019. According to a study, the amount of plastic that enters the ocean each year would nearly treble by 2040 if no action is made to curb expected growth in plastic manufacturing and consumption. According to the report, the adoption of technology and other alternatives “may eliminate by 2040 nearly 80% of the plastic pollution that pours into the ocean annually.”
Goal 14 of the United Nations’ Sustainable Development Goals (SDGs) recognizes the issues facing our marine ecosystem, which strives to “conserve and sustainably use the ocean, seas, and marine resources for sustainable development.”
Blue bonds are cutting-edge financial products designed to fund long-term marine and fisheries projects. Green bonds are a subset of them.
Blue bonds, according to the World Bank, are “debt instruments issued by governments, development institutions, or others to generate funds from impact investors to finance marine and ocean-based projects with positive environmental, economic, and climate benefits.”
Why is it known as Masala Bond?
Masala bonds are bonds that are issued outside of India but are denominated in Indian Rupees instead of the local currency. Masala is an Indian word that translates to “spices.” The International Finance Corporation (IFC) coined the word to describe India’s culture and food. Unlike dollar bonds, which pass the currency risk to the borrower, Masala bonds pass the risk to the investors. In November 2014, the World Bank-backed IFC issued the first Masala bond, raising $1,000 crore to fund infrastructure projects in India. In August 2015, the International Financial Cooperation issued green masala bonds for the first time, raising Rupees 3.15 billion to be used for private sector investments in India that address climate change.
HDFC became the first Indian business to issue masala bonds when it obtained 3,000 crore rupees from them in July 2016. NTPC, a public sector unit, issued the first corporate green masala bonds for 2,000 crore rupees in August 2016.
What is the blue economy?
“Sustainable use of ocean resources for economic growth, improved livelihoods, and jobs while conserving the health of the ocean ecosystem,” according to the World Bank. “All economic activity associated to oceans, seas, and coasts,” according to the European Commission.
What exactly is a green bond market?
What is the difference between a green bond and a regular bond? Green bonds are similar to conventional bonds in that the money raised from investors is used solely to fund projects that have a good influence on the environment, such as renewable energy and green buildings.
What is Upsc in the blue economy?
The sustainable use of ocean resources and ocean development initiatives for economic growth, improved livelihoods and jobs, and ocean ecosystem health are referred to as the “blue economy.” It also determines the Sustainable Development Goals (SDGs) of the United Nations, particularly SDG14, “Life Below Water.”
What are Transition Bonds?
Transition bonds are a new type of bond whose revenues are used to help a company make the transition to a lower environmental impact or lower carbon emissions. The funds can only be used to fund new and/or ongoing qualifying transition initiatives. The issuer of these bonds must pledge to adopting more environmentally friendly business practices. The project or the issuer does not have to be categorized as a transition bond “green,” but they must put the money towards climate-change-related activities. A coal mining company, for example, might issue a transition bond to fund carbon capture and storage efforts. Transition bonds proponents argue that it is preferable for enterprises aiming to become public companies to use them “Rather than being shut out of the green bond market with no other way to fund transition projects, it’s “greener” to finance their assets with transition bonds.
What are the guidelines and criteria?
Transition bonds have little criteria as of yet. AXA Investment Managers, on the other hand, released their Transition Bond Guidelines, which advise issuers to offer similar disclosures to those required by Green Bond Principles:
- Proceeds will be used to fund projects that are part of a pre-defined set of climate-related activities.
- Process of project evaluation and selection: Explain why these initiatives are crucial to finance in terms of commercial transformation and climate change. AXA encourages you to include information about the project’s environmental goals, as well as projected outcomes and impacts.
- Management of proceeds: Once a transition bond is issued, the net proceeds should be tracked in a formal internal process, with the technique certified by a third-party audit.
- Information: It is critical to provide regular and comparable reporting on the environmental performance and outcomes of the projects that have been funded.
These principles aren’t widely agreed; they’re in flux, and they’re meant to spark a discussion among stakeholders. The Corporate Knights and the Canadian Council for Clean Capitalism have also presented their draft Clean Transition Bonds Guidelines. The concept offers a taxonomy and classification system for various projects and issuers that is linked with the low-carbon economic transition.
Why are transition bonds important?
Transition bonds have the ability to enable businesses that would not otherwise be able to get sustainable finance to do so. They also have the potential to assist meet the growing demand for sustainable investment alternatives, which is at risk of going unmet due to the scarcity of green bonds. According to the Intergovernmental Panel on Climate Change (IPCC), between 2016 and 2050, an average of $3.5 trillion CAD in investments will be required to sustain the clean energy infrastructure required to minimize global warming. Green bonds only offer a portion of this, with total green bond issuance totaling $691 billion CAD between 2007 and 2018. Transition bonds are a way to fill in the gaps in your investment portfolio.
How are they different from a green bond?
Transition bonds, unlike green bonds, focus on an issuer’s commitment to become greener rather than the direct use of loan proceeds for environmentally friendly initiatives or the issuer’s reputation. A focus on behavior is a strategy that has lately acquired traction in the loan sector, especially through products like sustainability-linked loans.
Investors and banks are increasingly examining a company’s overall profile and commitment to decreasing its carbon impact when evaluating investment goods as green. In 2017, a major oil company, Repsol SA of Spain, sparked industry debate by issuing a green bond, setting the pattern for transition bonds. Because of Repsol SA’s sector, many investors questioned the bond’s long-term viability, and it was excluded from major green bond indexes. The campaign for transition bonds was accelerated as a result of this.
What are the challenges?
Green bonds are still viewed with mistrust, especially because no globally recognised standards have been established. It’s challenging to gain public faith in transition bonds as a solution to climate change rather than a way for companies to appear more ecologically good (a practice known as “greenwashing”). There must be well-defined and broadly accepted criteria for qualified transition bond projects, as well as transparent reporting requirements, to avoid greenwashing and skepticism. The European Union recently proposed a code that could eventually replace the Green Bond Principles.
What’s happening in Canada?
Transition bonds are especially crucial for industries that aren’t currently considered green, such as most mining, materials, and oil and gas companies in Canada. Transition bonds allow Canadian businesses to gain access to lower-cost financing for initiatives that lessen their negative environmental effect. This would allow Canadian businesses to move from high-carbon to low-carbon operations while minimizing the severe economic consequences of being shut out of low-cost funding markets right away. Working with financial industry leaders to increase Canada’s supply of liquid green and transition-linked fixed income instruments is one of the Expert Panel on Sustainable Finance’s recommendations.
What’s the future of transition bonds?
Regulations for the obligations required of enterprises to be eligible for transition bonds are still in the early stages. Companies will, however, almost certainly be asked to agree to particular targets as well as wider sustainability goals. Transition bonds may experience growth similar to that of sustainability-linked loans if the number of companies seeking finance for environmental projects continues to rise and institutional investment expands.