Inside the blue bonds boom: Why it's time to invest in the world's oceans

Inside the blue bond boom: Why it’s time to invest in the world’s oceans

Inside the blue bond boom: Why it’s time to invest in the world’s oceans

Ahead of COP26, as the potential for marine habitats – and ‘blue bonds’ – to play a major role in the fight against climate change becomes clearer, opportunities for far-sighted investors are beginning to flow, writes John Arlidge

Off the coast of Formentera in the Balearics is an organism that stretches 15km. Scientists call it Posidonia oceanica. To the rest of us, it’s seagrass. Few of us think about it much – unless we get stuck in it. But that may soon change.

Seagrass meadows are about to become very important – perhaps pivotal – to our future. That’s because they naturally ‘suck’ carbon dioxide from the air and convert it into plant matter, something the world needs more than ever.

Wetlands can hold five times more carbon in their soils, muds and plants than a temperate or tropical forest. One hectare of seagrass alone can soak up as much carbon dioxide each year as 15 hectares of rainforest.

Scientists estimate that coastal carbon sinks, dubbed ‘blue carbon’, have absorbed around 30 per cent of the carbon dioxide mankind has emitted by burning fossil fuels. Around 33 billion tonnes of carbon dioxide (about three-quarters of the world’s emissions in 2019) are locked away in them.

‘Blue carbon creates an opportunity to reduce emissions,’ says Roger Ullman, executive director of the Linden Trust for Conservation, an environmentalist group in New York City. ‘These fabulous ecosystems don’t cover a very large expanse of territory, yet still provide enormously important services to humanity.’

Blue carbon is attracting interest from big business, investors and climate campaigners who are keen to use natural processes, alongside human technologies such as direct-air capture, to suck greenhouse gases from the atmosphere.

As Dr Arlo Brady, chairman of the Blue Marine Foundation, an NGO devoted to restoring marine habitats and sequestering carbon, puts it: ‘Blue carbon is a vital tool, of which we need more. It’s part of a nature-based solution to climate change’.

Global sales of green bonds, including blue carbon bonds, have skyrocketed over the past five years, with $233 billion worth sold in 2020, a 13 per cent jump over the previous year, according to data compiled by Bloomberg.

That’s been accompanied by a clutch of new securities sold or in the works, such as carbon-neutral, transition, nature and sustainability bonds.

The Asian Development Bank aims to promote blue-bond issuance through its Oceans Financing Initiative, which will expand its investments and assistance in the ‘blue economy’ to $5 billion by 2024. The initiative will also offer revenue guarantees to reduce investor risk.

Bank of China’s Paris and Macau branches issued a $500 million three-year note and a CNY3 billion ($464 million) two-year note to help finance marine-related projects.

Spreads on the bank’s dollar bond tightened about 26 basis points since being sold, outperforming the broader market of Chinese investment-grade bonds, where average spreads narrowed around 23 basis points, according to Bloomberg-compiled data.

Protecting and increasing the size of wetlands is not only important to ensure future carbon emissions are better absorbed. Since they already store so much carbon, their destruction releases substantial amounts of CO2 into the atmosphere.

Aquaculture, agriculture, timber extraction and real estate development are destroying wetlands around the world at a rate three or four times faster than the rate of tropical forest destruction. To date, mankind has destroyed more than 35 per cent of mangroves, 30 per cent of seagrass meadows and 20 per cent of salt marshes.

If these ecosystems are restored and protected, up to 200 million tonnes of CO2 could be captured annually, scientists estimate.

‘We cannot tolerate the destruction of coastal ecosystems that are champions at removing carbon dioxide from the atmosphere and storing it in soils,’ says Patrick Megonigal, who studies how coastal marshes and forests respond to climate change at George Mason University near Washington DC.

Environmentalists are urging governments to set targets for protecting and restoring marine ecosystems as part of their commitments under the Paris Agreement on climate change. They are also calling for a moratorium on deep-sea mining, and for expanding marine-protected areas to cover at least 30 per cent of the world’s oceans and seas by 2030.

Currently, less than 8 per cent of the world’s crucial coastal wetlands are protected. ‘The ocean has not played a prominent role in the carbon debate until very recently,’ says Jane Lubchenco, a marine ecologist and adviser to the Biden administration’s Office of Science and Technology Policy.

‘Now the science is really leading the way and telling us that there is a phenomenal opportunity for the ocean to provide additional ways for us to mitigate climate that simply weren’t on our radar screen before.’

Big corporations, entrepreneurs and governments are beginning to step up. Australia, which is home to as much as 32 per cent of the world’s seagrass, mangroves and tidal marshes, has become a hot spot for investment.

The government will invest more than US$20 million in blue-carbon projects over the next 35 years, part of a roughly $75 million initiative aimed at protecting the ocean – although centre-right prime minister Scott Morrison has been criticised by environmental groups for not moving fast enough to reduce emissions. Australian regulators are also working with scientists to develop their own carbon credit specifically for blue-carbon initiatives.

Pollination Group, an Australian climate change advisory and investment firm, is working with private issuers including banks to launch a corporate blue bond with proceeds funding ocean-based biodiversity projects. These could produce ‘blue carbon credits’, which can be sold to the Australian government’s carbon-offset programme.

Blue carbon is one of five priority methods being developed in 2021 under an accelerated work programme,’ said a spokesman for Angus Taylor, Australia’s federal minister for energy and emissions reduction. More than 88 million metric tons of abatement has been credited under methodologies developed by the government there, he says. Peter Macreadie, a marine-science professor and head of the Blue Carbon Lab at Deakin University in Australia, adds: ‘We’re going to rely on nature to regain control of the planet’s thermostat.’

In the US, scientists have already restored seagrass on the east coast of Virginia near the Chesapeake Bay, and some members of Congress, including Senators Lisa Murkowski (Republican, Alaska) and Sheldon Whitehouse (Democrat, Rhode Island), have pushed to investigate further blue-carbon opportunities.

In Pakistan, local authorities and private investors are seeking to replant more than 800 square miles of mangroves.

In Colombia, a project to protect mangroves and marshes was approved by Verra, a US-based non-profit that oversees a carbon-credit programme, as its first blue-carbon conservation project. That means the project can issue Verra-certified carbon credits, which represent carbon that has been reduced or removed from the atmosphere. Companies can finance a project to earn carbon credits or buy the credits as a way to offset their own emissions.

In the Middle East, the Red Sea Development Company (TRSDC) is developing the Red Sea Project, a 50-hotel luxury tourism destination comprising 92 islands, mountains, sand dunes and dormant volcanoes in a relatively sparse and vast area on the west coast of Saudi Arabia.

The Red Sea Project has put regeneration at the heart of its development approach, with aims to be powered by 100 per cent renewable energy and to actively enhance the environment within two decades. The ambition is to create a 30 per cent net conservation impact through the development and to exceed what would be the goals and economic outcomes of this area if it was just declared a national park,’ says Carlos Duarte, the report’s author and a marine ecologist at King Abdullah University in Saudi Arabia.

‘In the 21st century the mantra to conserve and sustain the little that is left is no longer acceptable. The ambition TRSDC brings to create net positive conservation value has changed my vision of what role the private sector can play in driving towards a healthy ocean.’

In the UK, the seabed is more valuable as a carbon sink absorbing pollution from industry than as a source of oil and natural gas, estimates from the government’s Office for National Statistics (ONS) show. The findings put the value of Britain’s marine ‘natural capital assets’ at £211 billion ($300 billion) and represent an emerging area of research where nations attempt to put a value on the environment.

Using conservative estimates, the ONS said seagrasses, muds, sands and salt marshes already capture at least 10.5 million tonnes of carbon dioxide equivalent a year, with an estimated value of $57.5 billion. (By comparison, woodlands in Britain capture carbon worth about £55 billion.) But some argue the real value could be six times higher, with the seabed storing the equivalent of more than 60 million tonnes a year.

That value is also expected to grow in coming years, since the British government has set out plans to artificially remove pollution from industry and pump it under the seabed to help reach a goal of generating net-zero emissions by 2050.

One challenge for exponents of blue carbon is that, as far as investment is concerned, it is riskier than some alternatives. Blue carbon initiatives tend to be costlier than traditional carbon offsets such as tree planting.

Recent studies have also noted that carbon offset projects can differ wildly in costs based on the particulars of the ecosystem, making it harder to estimate payoffs. ‘The challenge we have with blue carbon projects, purely in a standalone way, is that if we take it and compare it with a carbon offset price alone, we have to take into account this project will have inherent risks,’ explains Torsten Thiele of the Global Ocean Trust.

‘The country or the ownership of the site will create potential risks, that the nature of the developer – their experience, their scale – creates risks. And then there are risks of the process assessment etc.’

But Thiele is hopeful that is beginning to change. ‘We need to think of blue-carbon economics in a broader sense. We need to think about how we can scale sustainable blue-carbon finance in an integrated way that takes on board innovative pathways for investment.

We’re moving from standalone to integration – to using nature-based solutions as part of the sustainable strategy for coasts, where we talk about a blue economy and blue-infrastructure finance as ways to describe a new normal in which the economics of the blue-carbon ecosystem are entirely tied to the broader outcome that we’re aiming for.’

There are opportunities on the horizon. Not least in the shape of the 26th UN Climate Change Conference of the Parties (COP26), which will take place in Glasgow in November.

Arlo Brady hopes the UK delegation at COP26 will give oceans, marine habitats and blue carbon the prominence they deserve. ‘Oceans have not received anywhere near adequate focus at previous COPs,’ he says.

‘Given the UK track record on ocean protection, which is quite good and getting better, I hope that Boris Johnson will be able to really up the ante here with other nations and get some impactful commitments.’

Main image by Philip Colbert

More from Spear’s 

Special report: Is impact investing here to stay?

Sustainable finance needs to ‘upskill’ to make an impact — and fast, experts find

Money to burn: How investors must save the world from climate change



 

FOLLOW US ON