Over the past decade, terms like “ESG,” “green financing,” and “green transition” have made their way into the business world as well as politics. The financial market has also been moving in a green direction by issuing green bonds. These loans have been on the market since 2007 as a way to finance efforts against climate change.
On the other hand, blue bonds are a relatively new phenomenon. Before the first blue bond was issued six years ago, water and ocean projects were included in the broader green loans. And they still can be. But blue bonds provide an opportunity to lend specifically for water quality and the protection of world oceans.
Until recently, the issuers have mostly been multilateral organizations and states. Individual companies in need of assistance with “blue projects” have struggled to stand out. One way is to bundle these blue corporate bonds into a fund and instead sell fund shares.
And that’s exactly what one of the world’s largest fund companies, American T. Rowe Price, aims to do.
In the past week, the fund company’s portfolio manager for environmental investments, Matt Lawton, has been traveling around Northern Europe to promote the fund giant’s blue corporate bond fund.
According to Matt Lawton, there is significant interest from Nordic investors.
“It’s a fairly broad group of stakeholders,” he told Placera during his tour of the Nordics, just before boarding a plane to Helsinki.
“From foundations to pension funds and insurance companies.”
### Blue is also Green
Blue bonds are a specific type of green bonds. While green bonds can cover anything related to the green transition, the idea behind specific blue bonds is to focus on loans for projects related to water, including improving water quality and healthier oceans. The latter is a neglected part of the UN’s environmental goals.
For an obligation to qualify as “blue,” the financed purpose must align with one of the two water-related UN sustainable development goals: Goal 6 on universal access to water and sanitation, or Goal 14 for sustainable development to preserve oceans, seas, and marine resources.
Among all of the UN’s sustainable development goals, Goal 14 is considered the most underfunded, according to the World Economic Forum.
Compared to green bonds, blue bonds are still in their infancy. The first project financed with blue bonds was a water and fisheries project in the Seychelles in 2018. Since then, several major global aid organizations have issued blue bonds, and in 2023, the International Capital Market Association (ICMA) published a guide to facilitate trading of blue bonds.
But there is still much to be done for the blue bond market to take off.
### The Summit No One is Making Waves For
There seems to be little desire to address our world’s oceans and drinking water for the earth’s population. The UN climate conference COP29 in Azerbaijan is coming to a close. But as the thousands of delegates leave Baku, there have been no successful measures for water and oceans.
In fact, blue investments have barely been mentioned at the conference.
Yet, the meeting in Baku is called the “finance COP” for the purpose of dramatically increasing climate financing for developing countries. However, observers say it is highly unlikely that a final agreement will mention funding for ocean climate solutions.
### The Largest Issuers of Blue Bonds
Among the largest multilateral issuers of blue bonds are the World Bank, the Asian Development Bank (ADB), and the geographically closer Nordic Investment Bank (NIB).
NIB recently issued a blue bond loan of SEK 1.5 billion on October 6, reportedly bought by several Swedish banks. According to NIB, the loan will be used for selected projects for wastewater treatment, prevention of water pollution, and water-related projects for climate change mitigation.
### Major Blue Investors in Sweden
Today, several major Swedish investors have blue bonds in their fixed income portfolios. Pension giant Alecta already invested $75 million in a blue bond in January 2022 to contribute to better marine environments around Belize. A blue bond for the Galapagos Islands worth $150 million was issued in May 2023.
In September, the Seventh AP Fund invested two billion SEK in blue bonds issued by ADB and IFC. The Second AP Fund does not currently have blue bonds, but they see some difficulties in blue corporate bonds compared to those issued by multilateral issuers.
“They have many different projects that they can consolidate under one umbrella or one bond to issue,” said Peter Lindblom, a portfolio manager at the buffer fund.
He continued:
“Water issues are important. But it is often difficult for companies to reach a sufficient volume for a dedicated blue bond, so they choose to go green instead.”
Multilateral issuers like the World Bank share the risk taken on by the organization, which is in turn guaranteed by the member states.
### Blue Corporate Bonds
American T. Rowe Price has partnered with IFC with the goal of raising $500 million to invest in blue corporate bonds.
Having IFC as a partner does not mean they are a guarantor. Instead, investors will take on the risk of the borrower, i.e., the company with a blue project in developing countries. The risk is diversified by pooling loans to several companies into a fund managed by T. Rowe Price.
And it is these fund shares that Matt Lawton is now out selling in the Nordics.
T. Rowe Price and IFC have each allocated $75 million in seed capital for the fund and aim to raise an additional $350 million from other investors ahead of a planned launch in December.
It’s about investors willing to take on more risk than with a large issuer like EIB to achieve higher returns.
The responsibility to protect against “Blue washing,” i.e., the project being financed not meeting the criteria, lies with the fund manager, according to Matt Lawtons.
“There is a heavy responsibility on T. Rowe Price,” Matt Lawton told Afv.
“The worst thing that could happen is that one of the obligations in the program is accused of ‘Blue washing.'”
### Trump’s Environmental Resistance is Just Rhetoric
The fact that the newly elected US President Donald J. Trump does not seem to prioritize the climate threat is well known. However, what Donald Trump says does not scare Matt Lawton.
“It’s a lot of rhetoric,” he said.
“I don’t think Donald Trump’s presidency needs to deviate from what has been the case so far.”
The choice to focus the sales trip on Northern Europe has nothing to do with a fear of a deteriorating market in the US due to Donald Trump’s policies, according to Matt Lawton.
“Politicians in the US are very loud in their rhetoric on these issues, but in reality, the companies I’ve spoken to are enthusiastic about continuing their sustainability strategies,” said Matt Lawton.
“And they are not deterred by who is in the White House.”