The Blue Bond: the shift of the financial market to oceans’ problems

The Republic of Seychelles has launched the first sovereign blue bond, a financial instrument aimed at addressing problems related to fishing and sustainable marine products.

Evolution of the market

Ten years ago, a group of Swedish pension funds considered investors necessity to support climate-friendly projects. They wanted a product that could finance sustainable products and that could also provide liquidity and a good financial return. The group approached the World Bank and the first green bond was designed. The green bond market has raised more than $500bn since then and it is going to grow even more. The concept behind it is now expanding into other types of so-called labelled bonds, namely those dedicated to a specific social purpose, of which the blue bond in question is a clear example.

Why a blue bond?

Oceans are in danger: increasing environmental stress - deriving from over-fishing, marine pollution, coastal erosion and the devastating impact of climate change - requires a massive response from both the public and the private sector. These challenges are too big to be faced only from the government, thus a participation of capital markets is needed.

The background

Seychelles is an archipelagic nation consisting of 115 granite and coral islands. It is famous for its turquoise waters, home to dugongs, turtles and tuna, for its underwater reefs and pristine beaches. It has a land area of 455 km2 spread across an Exclusive Economic Zone of approximately 1.4 million km2. As one of the world’s biodiversity hotspots, Seychelles is balancing the need to both develop economically and protect its natural endowment. After tourism, the fisheries sector is the country’s most important industry, contributing significantly to annual GDP and employing 17% of the population. Fish products make up around 95% of the total value of domestic exports.

The nation recently recognized the need to rebuild sustainability, governance and management of the fishing sector, issuing a Blue Economy roadmap. However, the cost of shifting to sustainable fisheries can be substantial and this is where private sector financing can play an important role. The blue bond is one way to create a link between investors and blue economy projects. As a matter of fact, Seychelles defaulted on its debt in 2008 and clawed its way back to prosperity with assistance from the International Monetary Fund. The need is of preserving environment and financial stability together. In February, the nation reached an agreement with U.S.-based conservation group The Nature Conservancy to buy up nearly $22 million of Seychelles’ outstanding $406 million sovereign debt in return for the country designating a third of its marine area as “protected”. Seychelles earlier this year created two new marine protected areas as part of the deal.

The transaction

The answer to Seychelles environmental and financial needs is exactly the blue bond. The bond was issued with a ceiling value of US$15 million, with a maturity of 10 years. It pays a 6.5 per cent annual coupon to investors, but the GEF $5mn concessional loan will reduce the cost to Seychelles to 2.8 per cent. It is further partially guaranteed by a US$5 million guarantee from the World Bank (IBRD). A World Bank team comprising experts from its Treasury, Legal, Environmental and Finance groups worked with investors, structured the blue bond and assisted the Government in setting up a platform for channelling its proceeds. The business case for a sovereign blue bond was initially identified through support to Seychelles from HRH Prince of Wales’ Charities International Sustainability Unit. Standard Chartered acted as placement agent for the bond and Latham & Watkins LLP advised the World Bank as external counsel. Clifford Chance LLP acted as transaction counsel. The bond was privately placed with three socially responsible impact investors based in the United States, namely Calvert Impact Capital, Nuveen (a subsidiary of asset management giant TIAA), and Prudential.
Proceeds from the bond include support for the expansion of marine protected areas, improved governance of priority fisheries and the development of the Seychelles’ blue economy. The beneficiaries of the proceeds of the blue bond will be local communities, civil society organisations and businesses who are seeking financing for activities that can support a transition to sustainable fisheries. Grants and loans will be provided through the Blue Grants Fund and Blue Investment Fund, managed respectively by the Seychelles’ Conservation and Climate Adaptation Trust (SeyCCAT) and the Development Bank of Seychelles (DBS). Proceeds from the bond will also contribute to the World Bank’s South West Indian Ocean Fisheries Governance and Shared Growth Program: the World Bank is supporting the Seychelles’ efforts to build a diversified blue economy via SWIOFish3, a project co-financed by the blue bond. SWIOFish supports countries in the South West Indian Ocean region to sustainably develop their fisheries sectors by improving fisheries governance, encouraging regional dialogue and cooperation and enhancing the fisheries’ value chain with better conservation, facilities, equipment and training.

Conclusion

“We congratulate the Seychelles for this pioneering blue bond. We are delighted to have supported this important transaction, achieved in close partnership with the investors and other development partners. We hope that this bond will pave the way for others—much like the World Bank’s first green bond catalysed the green bond market 10 years ago. The blue bond is yet another example of the powerful role of capital markets in connecting investors to projects that support better stewardship of the planet,” said Arunma Oteh, World Bank Vice President and Treasurer. Although the amount raised was small, it acted as a proof of concept for the blue bond structure. This transaction could serve as a template for creative impact investment solutions in the future.

Sources:
    Reuters, Financial Times, World Bank, FAO
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