- The market for bonds financing water conservation projects is approaching a "tipping point."
- The market is small, just about $5 billion, but it's seeing more enthusiasm than the early green bond market.
Blue is the next green for sustainable finance.
Blue bonds — debt that allows investors to finance water conservation efforts — are gaining traction.
"I would liken the blue bond market today to where the green bond market was 10 to 15 years ago," Matt Lawton, a portfolio manager from T Rowe Price, told Business Insider.
Today, the green bond market is valued at around $2 trillion. Compared to that, the blue bond market is much smaller, just about $5 billion, but it's on the cusp of a big change, Lawton explained. He's seeing even more enthusiasm around the asset than he observed for green bonds when they were at the stage blue bonds are today.
Lawton is part of the effort to launch the first blue bond strategy, and is seeking commitments from investors for a fund that will make investments in the space.
"It's a very nascent market today," he explained. "So one is not able to go out and invest several billion into blue bonds because the market doesn't exist. So what we're endeavoring to do is actually build out the market ourselves."
The firm has partnered with the International Finance Corporation, a member of the World Bank Group. They've each committed to putting up to $75 million into the strategy and will be looking to raise another $350 million t0 $450 million from investors. The fund would target a return 3% to 6% over the US Treasuries yield curve.
"Blue is kind of at that tipping point where there's a lot more enthusiasm and engagement amongst capital market participants, investors, underwriters, issuers," Lawton said.
"I think we're at this tipping point, whether it tips in '24 or '25 or '26, I have a high degree of confidence it's going to happen. I couldn't pinpoint the exact date, but it does feel like we're on the precipice," he added.
The economic argument
Blue bonds can finance anything from biodiversity and marine conservation to projects aimed at preventing overfishing to plastic pollution cleanup.
But for all its climate and sustainability goals, there's a compelling economic reason investors would put their money into the bonds, Lawton explained.
"Take, for instance, water sanitation, a utility, right? Long-term contracts, high recurring cash flows, there's a pretty strong economic argument to be made for investing in those types of bonds."
That's worth noting given the current backdrop for sustainable financing conversations. ESG investing has come under fire in the past year, driven by a wave of anti-woke sentiment. Climate-focused mutual funds sales dropped by 75% in 2023.
But blue bonds seem to have sidestepped the vitriol, in part because it's a heavily under-invested theme (less than 0.5% of the total sustainable debt market), but also because of that financial appeal.
"For all the politicization of ESG, this is one of those few topics that we can all agree on," Lawton said.
The origin of blue bonds
One of the first blue bond programs was launched with the help of a non-profit organization called The Nature Conservancy to finance conservation efforts in Seychelles. The program used what's called a "debt-for-nature" swap, where a portion of a country's debt is forgiven in exchange for local investments in conservation measures.
"I give The Nature Conservancy a lot of credit because they created a blue bond program a few years ago that I think really kicked up a lot of interest in the space," Preeti Bhattacharji, JPMorgan's head of sustainable investing, said.
The organization is now one of the best-known issuers of blue bonds, Bhattacharji said.
Lawton from T Rowe Price added that banks like the Asia Development Bank and the Export-Import Bank of Korea have also issued blue bonds. The funding method is actually gaining a lot of traction in the Asia-Pacific region given the region's dependence on marine resources, with issuance doubling to $1 billion since its debut in 2020, the South China Morning post reported in September last year.
And more institutions are jumping in. Last August, wind energy company Ørsted became the first energy company to issue a blue bond, worth 100 million euros and maturing in 2028. Mitsui O.S.K Lines, a Japanese shipping company, also announced in December a 10 billion yen ($66 million) blue bond issuance.
While the buy-side enthusiasm is still limited to a relatively small pool of investors, Bhattacharji from JPMorgan said the market has a lot of potential to grow as sustainability becomes a priority for future generations.
"As younger people come into their wealth, come into their power, enter the space, start asking these questions, the pattern that I've seen — not specific to blue bonds, but across sustainability — is there's just growing, swelling interests across these subjects," she said. "And I don't see any reason blue bonds should be an exception to that."