Blue finance – the issuance of bonds whose proceeds target water-related sustainable projects, such as those involving water management, marine ecosystem restoration or offshore renewable energy – is a nascent but powerful area in the sustainable finance universe that offers opportunities to emerging markets in Asia and Latin America, which have long coastal lines and strong freshwater demand, according to a recent report.

The global issuance of blue bonds has grown to reach US$12.3 billion by June 2024, finds the Sustainable Fitch report, which notes that while the bonds account for less than 1% of all sustainable finance instruments, they are gaining popularity among corporates when they plan their fixed-income investment strategies.

Unlike green or sustainability bonds, whose issuances are clearly governed by respective Green and Sustainability Bond Principles under the International Capital Market Association (ICMA), blue bonds do not have a set of specified governing principles that identify eligible investment projects.

As a result, many existing blue bonds in the international capital market are actually labelled as being green or sustainability bonds. Since there are no dedicated “blue bonds principles”, investors have a low level of confidence when attempting to identify eligible blue projects, and this poses a material challenge for blue bonds’ scalability.

For a clearer reference in identifying eligible blue projects, the ICMA, International Finance Corporation and Asian Development Bank developed a set of voluntary guidelines in September 2023, outlining a series of marine and ocean activities that fall under the label of blue bonds. This is an important step in facilitating the development of the bonds in international markets.

While the original intention for blue bonds is to raise finance for marine and ocean-based projects, most blue bonds in the market currently target freshwater projects, such as water supply or sanitation infrastructure. By comparison, the ocean-related projects are relatively rare.

The reason is that projects involving freshwater, according to Sustainable Fitch, are more clearly delineated than ocean-based projects worldwide. This clarity is crucial in facilitating investor confidence, and, therefore, contributes to the faster growth of freshwater projects compared with that of ocean-related ones.

Three of the most popular blue bond projects, the report shares, involve sustainable water management, marine renewable energy, and terrestrial and aquatic biodiversity conservation.

In the blue bond market, one trend is the increasing role of corporates as issuers. Before 2020, the issuance of blue bonds was dominated by financial institutions and supranational entities. Starting from 2022, corporates began to play a bigger role; and, by the start of 2024, they have become the single largest type of issuers, with over US$1 billion of issuance in the first half of the year. This demonstrates corporates’ increased awareness of water-related sustainability issues, and that they have adjusted their fixed-income investment strategies to allocate more funds to blue-themed projects.

Brazil, China tops

Brazil has been the most active issuer of blue bonds (often with a green or sustainability label) from 2022 to 2024, according to Sustainable Fitch. During this period, the country tapped the market 10 times and had a total issuance exceeding US$2.5 billion. The runner-up is China, which issued blue bonds three times, amounting to nearly US$1 billion of issuance. Issuances by Southeast Asia countries are lacking, the report points out, as they do not have comprehensive regional taxonomies covering freshwater and ocean activities.

“[Brazilian bond issuances] are from a certain number of water utilities and sanitation companies, who made repeated issuances of blue bonds based on their existing sustainability or blue finance frameworks,” states Jingwei Jia, Sustainable Fitch’s associate director of ESG research, “and that are supported by local arrangers’ expertise in structuring this type of transactions.”

Current active issuers, Jia adds, are mostly sovereign governments and financial institutions aiming to support marine conservation and biodiversity activities. “While there is growing interest from issuers and banks to explore this new financing instrument,” she shares, “issuers and banks may [need to] take time to build their expertise and knowledge to set up a blue finance framework and structure blue-labelled transactions.”