Blue finance: Closing the water financing gap

Blue finance is an emerging area of sustainable finance. It has been receiving increasing interest from governments, non-profit organizations, investors, and financial institutions globally. Since its inception, many have voiced concerns about the definitions and scope of “blue”. In part due to the plethora of guidance documents that have become available in recent years, the public debate is now shifting toward an equally important question: To what extent can this emerging form of sustainable finance help close the global water financing gap? And, what is needed to make this happen?

Blue ecosystems – oceans and water-related systems – play a vital role in human development. Blue ecosystems provide food for more than three billion people, jobs for over 30 million people, and economic activities worth at least USD 1.5 trillion per year.[1] Like the green economy, a sustainable blue economy uses ocean and water resources in environmentally sustainable ways and preserves ecosystem integrity. Unfortunately, the blue economy is not environmentally sustainable in many places around the world. Overfishing, environmentally harming coastal development, and water pollution are just some ways in which human activities seriously undermine blue ecosystem health. On top of that, some human activities make critical water resources, infrastructure, and industries increasingly vulnerable to climate change.[2] [3] With almost half of the world’s population living near ocean and coastal ecosystems, a blue economy that is slated to grow to USD 3 trillion by 2030,[4] and a vast number of people still lacking access to safe water and basic sanitation, there is an unequivocal need to steer financial resources toward water-related sustainable development.

There is a global shortfall in the funding for water-related Sustainable Development Goals (SDGs). The financing gap to meet all SDGs by 2030 amounts to USD 4 trillion per year. As part of this total funding gap, the SDGs related to clean water and sanitation require an additional USD 0.5 trillion per year, while SDG 14 (conserve and sustainably use the oceans, seas and marine resources for sustainable development) requires an additional USD 0.3 trillion per year.[5] [6] Together, the blue SDGs constitute 20% of the total SDG financing gap. Since this gap is acknowledged as a key barrier to water-related sustainable development, blue finance has become a recurring theme at global discussions dedicated to water issues, including at the United Nations Water Conference 2023, the Global Water Summit[7] the United Nations World Oceans Day[8] and the World Water Week.[9] In spite of widespread attention for water issues, the associated SDGs are among the most underfunded.

[1] What is the blue economy?

[2] Projecting Coral Reef Futures Under Global Warming and Ocean Acidification

[3] Climate change and freshwater ecosystems: impacts across multiple levels of organization

[4] The Ocean Economy in 2030

[5] The cost of saving our ocean - estimating the funding gap of sustainable development goal 14

[6] SDG Investment Trends Monitor

[7] Global Water Summit

[8] United Nations World Oceans Day

[9] World Water Week

The blue finance market is a relatively new segment of the sustainable debt market that can help close the global water financing gap. Blue financing instruments are debt instruments specifically designed to finance the sustainable use and protection of water resources. There are two main types of blue finance: use-of-proceeds finance and sustainability-linked finance (see box 1). What sets blue finance apart from conventional finance is that it should generate financial returns, but also lead to blue activities (in the case of use-of-proceeds finance) or blue impacts (in the case of sustainability-linked finance). On two occasions to date, blue bonds were issued in the context of debt-for-nature or debt-for-climate swaps (see box 2). As with green bonds, issuing blue bonds is more costly than conventional financing. This is due to the costs of managing and monitoring the use of proceeds, impact reporting, and external verification.[10]

[10] Blue bonds for marine conservation and a sustainable ocean economy: Status, trends, and insights from green bonds

The blue finance market benefits from at least 16 different guidance documents that have been issued since 2018 (see appendix 1). Many of these documents were developed for the wider green finance market. Since blue finance is a subset of green finance, these documents are also relevant for blue finance. Not all guidance documents have the same thematic focus and scope. For example, water supply and sanitation is included as a blue project category in the International Finance Corporation’s Guidelines for Blue Finance (2022), but not in the latest guidance of the International Capital Markets Association (ICMA, 2023).

The Green Bond Principles and the Green Loan Principles[1] provide leading guidelines for the use of proceeds from blue finance (blue bonds and loans).According to these principles, proceeds should be exclusively allocated to carefully selected blue activities. These activities should contribute to climate change adaptation or mitigation, natural resource or biodiversity conservation, or pollution management. The use of proceeds and the resulting impacts should be monitored and reported. Additionally, a voluntaryEuropean Green Bond Standard was published in 2023. This standard aims to set the “gold standard” and is aligned with the EU taxonomy for sustainable activities to define whether activities are green (or blue). The EU taxonomy considers activities to be environmentally sustainable if they substantially contribute to at least one out of six environmental objectives without causing significant harm to any other objectives.

The Sustainability-Linked Bond Principles and Sustainability-Linked Loan Principles[1] provide leading guidelines for sustainability-linked blue finance. The guidelines stipulate that progress on carefully selected key performance indicators should be measured and benchmarked. Furthermore, bond or loan terms should be adjusted based on the issuer’s sustainability performance. The principles also stress the importance of reporting and external verification.

[1] What is the blue economy?

[1] What is the blue economy?

Blue bonds and loans can be used to fund a broad range of activities and impacts, as long as they are water-related. Blue investments generally refer to investments in sustainable activities and impacts in marine or coastal environments. The marine environment includes the deep and shallow parts of oceans as well as the seabed. The coastal environment includes saline, brackish, and freshwater ecosystems, such as salt marshes, estuaries, mangroves, coral reefs, and seagrasses. Sometimes, a maximum distance from coastal or marine areas is used to determine if an activity is blue. For example, the Asian Development Bank mentions in its guidelines that wastewater management projects should be within 100 kilometers from the coastal or marine environment.[11] Others stipulate that activities are eligible as long as they are connected with ocean quality (e.g., by reducing pollution runoff into a river that flows into an ocean).[12] Some blue activities target clean water supply and sanitation. These activities are not geographically constrained.

Depending on the context, there may be additional geographic constraints on blue activities and impacts. This is because advancing one environmental objective should not harm other environmental objectives. For example, an offshore renewable energy project should not be located in ecologically sensitive areas. Similarly, a sustainable fisheries project should not be conducted in areas where it puts pressure on endangered, threatened, or protected species.[13] Table 1 provides an illustrative overview of potentially eligible activities and impacts.

[11] Green and Blue Bonds Framework

[12] The Blue Bond Market: A Catalyst for Ocean and Water Financing

[13] Bonds to Finance the Sustainable Blue Economy: A Practitioner's Guide

Blue finance has been used to support a wide range of activities and assets related to the sustainable blue economy. This includes (re-)financing new or existing blue economy assets, like research and development of new blue economy technologies, and the purchase of physical assets used in the sustainable blue economy, such as ships, fishing gear, and renewable energy infrastructure. Environmentally harmful activities, such as offshore oil and gas exploration and deep-sea mining, are excluded.

Bonds are labeled “blue” only if proceeds are exclusively allocated to blue purposes. The proceeds of some bonds that are labeled green have been used primarily for blue purposes. In 2022, 7% of green bond proceeds were used for blue activities (EUR 33bn).[14] One example is the 20-year Dutch Sovereign Green Bond auctioned in 2023. The proceeds of this bond will mainly be used to the fund the Dutch Delta Program. This national program aims to improve flood safety (blue), freshwater availability (blue), and spatial climate change adaptation (blue and green).

More than EUR 8bn in “pure” blue bonds have been cumulatively issued for projects and programs between 2018 and 2023 (see figure 1). These blue bonds typically comprise projects or programs that span over multiple project categories. Most blue bonds are used to fund marine conservation and waste management. Blue bonds have been issued by sovereigns and banks, but also by corporates. For instance, Barbados issued a blue bond to fund marine conservation efforts, including the establishment of marine protected areas. Thailand introduced it’s first blue bond to fund nature-based solutions. In the corporate sector Ørsted raised EUR 100m through a blue bond to fund marine conservation and sustainable shipping in 2023. Seaspan Corporation secured EUR 690m to fund its low-carbon transition. An overview of bonds issued between 2018 and October 2023 is included in appendix 1.

[14] Climate Bonds Initiative: Market Data

The blue bonds market cautiously explored all main blue project categories outlined in the latest guidelines (ICMA, 2023). For example, IDB Invest’s blue bond is used to improve water access and sanitation in the Caribbean and Latin America, and BRK Ambiental’s bond is used to improve access to potable water, sewage treatment, and sanitation in local communities in Brazil. Other categories for which blue bonds were issued include shipping and port logistics, offshore renewables, tourism, and agriculture. In particular, the Inter-American Investment Corporation issued a bond with the intention of allocating a portion of the proceeds to decarbonize port operations. Blue bonds were issued to fund offshore wind, offshore solar, tidal, wave, and ocean thermal energy projects in Thailand and Ecuador. Finally, a very limited number of projects focused on sustainable tourism around conservation areas, and on optimizing the use of irrigation water, pesticides, and fertilizers in the agricultural sector.

To date, blue bonds have been sparingly used to make coasts resilient against floods. Only three blue bonds issued between 2018 and 2023 were used for flood protection (excluding green bonds used for blue activities). Some green bonds have been issued, the proceeds of which will be used for coastal protection. The DSTA Green Bond is one example. Despite the eligibility of nature-based flood protection for blue finance, there exists a global investment gap amounting to trillions of dollars.[15] Ramping up investment in this project category can have considerable positive impact and is often proving more cost-effective than traditional flood protection methods (e.g., seawalls).[16]

Since 2018, only a handful of blue loans has been issued. Consequently, blue loans constitute only a small share of the green loan market (at least EUR 39bn as of Q4 2023). In 2023, the World Bank provided a EUR 27m loan to the Maldives to support the country's marine conservation efforts. Between 2020 and 2022, the International Finance Corporation issued EUR 32m in blue loans for sustainable ocean projects in Africa and Latin America, and EUR 100m for similar projects in central Eastern Europe.[17] In 2021, the European Investment Bank provided a EUR 200 m loan to the Port of Rotterdam Authority to support the transition to more sustainable port operations. The year 2023 marked a significant increase in blue loan issuances, including to fund improved aquaculture facilities (EUR 61m)[18], to remove ocean plastic (EUR 41m),[19] strengthen blue economic sectors (EUR 114m),[20] and protect oceans and critical clean water protection (EUR 138m).[21]

[15] Global Investment Costs for Coastal Defense through the 21st Century

[16] The global flood protection savings provided by coral reefs

[17] Climate Bonds Initiative: State of the market 2022

[18] Salmon Evolution, Proximar sign blue loan deals

[19] ADB Signs $44.2 Million Blue Loan with ALBA to Reduce Ocean Plastic Waste in Indonesia

[20] NMB: How Sh572 billion in EU financing will boost lending

[21] New Blue Loan to Help Bank of Qingdao Pilot Blue Finance, Supporting China’s Climate Goals

Water finance flows will need to be ramped up significantly to bridge the gap on water-related sustainable development goals by 2030. Figure 2 shows the share of countries that are still far from reaching key goals associated with SDGs 6 and 14. The most substantial gap exists in ensuring clean ocean water: Only 7% of countries achieved sufficient ocean water quality by 2023. Other goals with large gaps include the protection of marine biodiversity (goal achieved in only 11% of countries), and wastewater treatment (23%). Although blue finance is expanding (see figure 1), the annual flow of blue finance (including green bonds with blue use of proceeds) is far from sufficient to fully address these goals.

The unwavering need for investment in blue sustainable development is likely to drive the growth of blue finance throughout this decade. Water lies at the heart of the climate crisis.[22] The majority of climate change impacts are water-related, including sea level rise, water pollution, and drought. With ongoing global warming, there will be a continued need for investment in infrastructure and technology to protect against dry and wet extremes and to provide water where it is needed. This provides numerous opportunities for corporates and investors in the coming decade, spanning fields such as wastewater treatment, desalinization, and (waste)water infrastructure.[23] Water is also a leading environmental, social, and governance (ESG) concern: A survey among 800 investors revealed that they consider water the third most important ESG risk (after cybersecurity and anticorruption).[24] Ultimately, blue finance serves as a signal of commitment to addressing water-related risks.

However, the blue finance market faces several challenges. First, there is still confusion about the meaning and definition of “blue”, despite the latest ICMA guidance on blue finance. This confusion was once again evident in 2023, when a hitherto blue bond was relabeled as a “marine conservation-linked bond” due to definitions being unclear.[25] As long as ambiguity persists, investors may prefer bonds and loans under the broader “green” label. This would be a missed opportunity if it reduces the amount of funds earmarked for water-related SDGs. Second, there are concerns that blue bonds do not have sustainable impact.[26] This is because it is often difficult to quantify impacts due to a lack of baseline data. Even when baseline data is available, quantifying impacts for specific project categories can be challenging. For example, it is more challenging to estimate marine biodiversity gains than reductions in greenhouse gas emissions or waste generation. A lack of confidence in sustainability impacts could limit the long-term scalability of blue finance. As far as the seafood sector is concerned, a lack of traceability can make it challenging to ensure that blue bonds are not associated with forced labor at any point in the supply chain. Finally, some blue economy sectors depend on a common pool resource, such as ocean fisheries. The sustainability of such resources is beyond the control of individual corporates or countries. This makes them less willing to issue blue bonds, unless there is at least some degree of coordination with other beneficiaries of the same resource.

The blue finance market needs to start developing a credible track record of environmental impacts. During past blue bond issuances, investor demand for blue bonds has often outstripped supply.[27] To sustain interest in blue-themed bonds, future blue bonds and loans need to be aligned with recognized standards and principles. This will contribute to the legitimacy of the blue concept, while also excluding environmentally unsustainable sectors. In addition, more attention should be given to project-specific, environmental baselines.[28] These baselines are necessary for measuring environmental impacts. Past reviews of blue bond issuance also highlight the need for enhanced disclosure of project details, including regarding baselines and anticipated impacts. The availability of project-specific information will help to assess the sustainability impacts of blue finance.

[22] Water – at the center of the climate crisis

[23] Report: Investing in a Water-Secure Future

[24] ESG in Credit - Water Issues

[25] Debt Swaps Arranged by Credit Suisse, BofA Face Scrutiny

[26] Blue bonds for marine conservation and a sustainable ocean economy: Status, trends, and insights from green bonds

[27] The Blue Bond Market: A Catalyst for Ocean and Water Financing

[28] Blue bonds for marine conservation and a sustainable ocean economy: Status, trends, and insights from green bonds

Blue finance is a relatively new segment of sustainable finance that focuses on water-related risks and ecosystems. Since its inception in 2018, the blue finance market has grown rapidly. This growth is expected to continue, given the need for investment in blue sustainable development from a societal perspective and also from an ESG management perspective. As the debate on the scope and definition of blue finance settles, attention is now shifting to the need for credible and detailed track records of blue impacts. Ultimately, the legitimacy of blue finance hinges on its ability to translate into actual blue impacts.