It's time for blue finance
As the oceans reach a crisis point, private capital must be deployed to fund sustainable solutions. Given that the seas are equivalent to the world’s seventh largest economy, finance is more aligned with the deep than has been previously recognized. A handful of bankers and investment managers are leading the way, but success will require a collective effort from across the financial industry.
The problems appear insurmountable. Underwater videos depict divers swimming through plastic bottles and waste in Indonesia; photographs from marine biologists on the Great Barrier Reef reveal haunting scenes of once brightly coloured coral now grey and dead; and documentaries show fishermen in the Philippines returning with empty boats.
The images are upsetting. The statistics are horrifying: 75% of the world’s fishing resources are in advanced decline; by 2025 there will be one tonne of plastic residue in the oceans for every three tonnes of fish; by 2030 about 90% of coral reefs will be under threat of extinction, while many species of sharks, whales, turtles, rays, coastal birds and mammals may already be gone.
Our oceans are under attack on every front: climate change, plastics, pollution, over-fishing, oil spills, acidification, excessive boating activity and coastal development. But it is not too late to reverse the trend. And, unlike forests that can take hundreds of years to regenerate, scientists have shown that oceans can recover in short amounts of time if the right measures are taken.
Beyond altering our own individual behaviour, those measures need two things in particular – political will and capital. Awareness has dawned in other areas of the environment that government funding and philanthropic donations alone cannot provide enough money. And the same realization is dawning for the health of the 70% of our planet that is blue.
Just as green finance has emerged in response to deforestation and carbon emissions, so too now people are looking to the capital markets and to the investment community for answers for our oceans.
Sustainable solutions are needed – and urgently. A committed few are pioneering the way, but they need support.
Blue capital, blue finance and the blue economy; it is the last of these that those working in conservation and finance are now pushing as a term. They were trying to get capital moving by pointing to the devastation of marine life, but it just was not getting people’s attention. Maybe, they say, if we remind people of the oceans’ economic value, they will listen.
It’s not new: oceans and finance have always been interconnected. According to the World Wildlife Fund, the ocean is the equivalent of the seventh largest economy in the world in its contribution to GDP. The value of goods and services from coastal and marine environments amounts to about $2.5 trillion a year. The extraction of marine resources is worth $6.9 trillion. Tourism and industries of productive coastlines amount to $7.8 trillion. Some 90% of international trade in goods is transported by sea.
The ocean crisis in numbers
It is a shared economy, on whose health we are all dependent. Another two billion people will be added to the planet before 2050, and all of us rely on our oceans for food, jobs and energy. But the blue economy is being disrupted by pollution, over fishing and climate change, and it could fail.
However, where there are challenges there are often opportunities. And when it comes to the blue economy, “the opportunities for investment are endless,” says Torsten Thiele, founder of the Global Ocean Trust.
How does the future blue market compare to the green market in potential size?
“We should get used to thinking about our ocean as this collective blue opportunity,” says Thiele. He lists as examples: sustainable seafood, clean energy, coastal resilience, mangrove restoration, coral nurseries, marine protected areas (MPAs), waste management and plastic-alternatives.
Then there are more ‘out-of-box’ investments, such as illegal fishing tracking devices, clothes made from trash pulled out of the ocean, water-surface cleaning robots and, of course, data.
“Don’t forget the data,” says Thiele. He makes a good point. The data from monitoring fishing patterns and ocean activity could save billions of dollars by discovering better shipping routes and more efficient fishing, and of course, by catching illegal fishing.
“If you removed half the world’s fishing fleets, we would still have the same fish catch. Fishing is over-capitalized,” explains Kristin Rechberger, chief executive of Dynamic Planet points out.
Beyond shifting fishing subsidies to fund conservation, could this be something an impact bond could take care of? The question is: who would issue it? After all, fish ignore national boundaries. The issuer of a bond could well end up benefiting an entirely different nation to the one intended.
Take the case of French Polynesia. It has a small fishing fleet, so its territorial waters are like a large MPA. The spillover of fish from its waters increases the revenues of foreign fleets, who fished around the edges, by roughly $200 million a year.
Now suggestions have been made to capture some of those revenues for French Polynesians by leasing a ring inside the country’s territorial seas, called an ocean halo, where foreign vessels fishing the area pay a fee to tap the bounty spilling over. Those fees would pay for management of the country’s seas. It’s a win-win.
While there are challenges with a shared economy, there are also solutions. But with so many moving parts, where best to start when it comes to finance?
Among the banks there are a handful of institutions and individuals committed to moving blue finance forward even if these answers are not all quite worked out yet. Fabian Huwyler, head of green solutions within the impact advisory and finance department at Credit Suisse, is helping to lead that effort.
Huwyler was part of the team at Credit Suisse that developed the first-ever conservation finance product among the large banks, the Nature Conservation Note, in 2014 and is working on the development of a blue investment product that would finance solutions around the UN’s Sustainable Development Goal 14 – ‘Life below water’.
Switzerland may well be land-locked, but backing blue finance makes sense for Credit Suisse, whose chief executive Tidjane Thiam has been vocal about the bank’s commitment to sustainable finance and impact investing.
In May, Credit Suisse’s European international wealth management business, led by Claudio de Sanctis, hosted a sustainable oceans investor event in Lisbon – probably the first of its kind by a bank. Sir Richard Branson beamed out on a video broadcast to potential investors watching from the banks of the Tagus, relaying his message that “the ocean is everybody’s business”.
Huwyler says that the role of financing in saving the oceans has now been affirmed. He points to the launch of two sets of finance principles: the high-level Blue Economy Principles spearheaded by the EU; and the more operational, Principles for Investments in Wild-Caught Fisheries, spearheaded by the environmental advocacy group the Environmental Defense Fund. Then there is the launch of The Economist’s Oceans Initiative, which has finance as one of three pillars.
At JPMorgan, Matt Arnold, global head of sustainable finance and a long-standing oceans advocate, has also been brainstorming how to tackle financing sustainable oceans. With JPMorgan Chase’s technical and financial support, the Nature Conservancy, through its investment arm NatureVest, put together a $22 million sovereign debt conversion for the Seychelles in 2016. Some 30% of the Seychelles is now on track to becoming an MPA.
The Seychelles is also preparing to issue a blue bond, the first of its kind, to provide $3 million for conservation, climate adaptation and fisheries management initiatives over six years and $12 million for a revolving loan fund that will seek new investments to make fishing more efficient.
“So far, we’re seeing just small ticket size deals, but it will shift,” says Arnold. “There’s a real sense of mission emerging. When the mainstream banking teams get engaged, then things like this move to the top of the list. But capital follows the projects, so the real work needs to be done on building the pipeline.”
But there is a dilemma, as Huwyler points out: “We are awash with private institutional capital seeking impact solutions and a financing need by projects on the ground, but private capital is seeking private returns, and the majority of ocean-related projects are not private but public goods.”
That calls for a different approach when it comes to building a pipeline of deals.
Arnold says: “You can hold a meeting with representatives from government, mining, oil and gas industries, shipping, fishing, and tourism and there is almost nothing that connects them. You have to be open and creative.”
But all this is not entirely new. Huwyler points out: “For public finance, there is an opportunity to allocate more proceeds to sustainable ocean initiatives through a bond route – such as sovereign or municipal bonds to finance coastal resilience projects.”
Projects such as mangrove forest restoration (a 100-metre stretch of mangroves can reduce wave height by 66%, for example) could be financed by a municipal bond. The trouble is, of course, that many of the countries that are ripe for natural coastal infrastructure or MPAs are emerging markets and would incur a high cost of funding. There, de-risking is important, says Arnold. He points to credit enhancements from the World Bank or the Overseas Private Investment Corporation as possibilities.
Conservation NGOs are also part of the growth in blue finance, and that too is a complex relationship to manage. For-profits and non-profits do not always speak the same language, but, as has been seen in the green finance sector, NGOs have deep expertise in the area of conservation and experience of working with local people. That expertise needs to be at the table.
Fixed income seems the agreed starting point for banks – blue bonds, blue notes, blue loans. Arnold points out that banks do not need to set up blue finance teams, they can get going now using their public sector or infrastructure teams.
“If we can stay focused on the connection of our oceans to that which is also happening on land – health, climate, livelihoods, products – then that will trigger more types of creative partnerships,” says Rechberger.
Not getting attached to blue finance as a term is also going to be useful for deals in areas such as waste management. Is an investment in sewage treatment in a country where 100% of its effluence ends up in the ocean, blue or green finance? Arguing about colour seems an irrelevance when the goal is to get it done.
There’s room for everyone. If only people can be open to collaboration and learning each other’s perspectives and language - Kristin Rechberger, Dynamic Planet
The global banks seem the obvious contenders to advance blue finance because of their geographic scope, but the blue economy also creates an entirely new playing field. The largest economies by exclusive economic zones (EEZ – sea zones determined by the UN) are not always the world’s largest economies. France, the US, Australia, Russia and the UK have the five largest EEZs. Indonesia, Canada, Japan, New Zealand and Chile follow. Domestic banks in these countries therefore have an incentive to be part of any blue finance solution.
Looking at countries by coastline or by water mass also creates a different top five to the usual list of largest economic powers.
“There’s room for everyone,” says Rechberger. “If only people can be open to collaboration and learning each other’s perspectives and language. We need to move quickly, but we also don’t need people rushing projects through just to say they were the first, only to discover those projects weren’t effective in ocean protection or management. Ultimately we need to replenish the bankrupt asset.”
The extent to which a fixed income market develops around oceans will be determined by political will. Despite the contributions of a country’s own blue economy to its overall GDP, there can be resistance to change if the long-term benefits are not understood.
Restricting fishing is a painful policy for those whose livelihoods depend on it, for example, as is the reduction of subsidies. Some fishing bans have led to riots. Rethinking mining and deep-sea drilling can also make governments nervous. It can be a big leap to shift to solar and wind power, especially for poorer economies. And then there is the international problem of foreign illegal fishing.
Bold leadership will be needed. Some countries appreciate the urgency and the long-term upside more than others. Their efforts show that decisiveness pays off. The US, for example, implemented a series of fishing reforms in 2006 that included science-based limits and rights-based approaches. Since 2008, the US fishing industry has seen a 23% increase in catch due to recovered fish stock, a 32% increase in value and a 35% increase in related jobs.
In Indonesia, Susi Pudjiastuti, the fisheries minister has taken an unusual approach to illegal fishing that has borne immediate results. Foreign boats caught fishing illegally in Indonesian waters are emptied and blown up – a strategy that seems to have stopped illegal fishing almost overnight.
The problem is of course that policies change, especially when governments change.
If political cooperation is the first challenge, scale is the second.
Fabian Huwyler, head of green solutions within the impact advisory and finance department at Credit Suisse
Huwyler points out: “For the private sector, the challenge will be to find enough cash flow-generating projects to bundle them in a liquid, at-scale investment vehicle.”
People in ocean finance are floating ideas about a collective body to represent the oceans and to be an issuer of debt. Thiele suggests the creation of a specialized financing institution, an Ocean Sustainability Bank, modelled on the EBRD – the inception of which he was involved with in 1990.
“It’s a bold vision, but let’s not forget the EBRD is a financial institution created to solve a challenge of the day,” he says. “If we had such an institution for the ocean, we could get to scale more quickly.”
Others are suggesting some sort of G20 of the largest countries by sea-mass that could galvanize global political will and set some standards and goals that may encourage the growth of a financial system based on the sustainability of our oceans.
Jose Soares dos Santos, founder and chairman of Oceano Azul Foundation, says institutions such as his could join together and work on education and research through the ownership of aquariums around the world – his foundation runs Lisbon’s aquarium, the Oceanario de Lisboa.
Thiele suggests collaboration at coastal and seascape level to provide scale: “One way to offer a larger institutional-sized investment approach would be to take a large coastal area and view it as a single project. Mangrove forests and sea grasses could be protected while waste management is improved and pollution is decreased. You could have something like an integrated infrastructure-based approach.”
As an industry and as a planet, the urgency is such that we will have to open a dialogue around how we invest in expanding fisheries and shipping - Mike Eckhart, Citi
Indeed, ideas are plentiful for investment opportunities when it comes to saving our oceans. Could we have blue resilience carbon credits? What about aquaculture?
According to research from the Bren School of Environmental Science and Management at the University of California, shellfish could help with the doubling of protein production the world will need by 2050. It would require an area as small as the shallow continental shelf of New Zealand, with emissions of greenhouse gases equivalent to only one-and-a-half times that of Texas.
Companies like SystemIQ are looking at solving our plastic crisis through investments in recycling and collection and partnerships with local governments.
Insurance companies such as Swiss Re are reported to be looking at innovative financing for coastal resiliency, in collaboration with local governments and the tourism sector. With lower insurance claims from coastal hotels, the cost savings can pay for resilience projects.
Many of these ideas, however, need philanthropic backing to get them to the start line.
Marisa Drew, chief executive of impact advisory and finance at Credit Suisse, says a structure to support pilots can already be found.
“Blended finance that spans from pure philanthropy through various risk/return profiles is perfect for where we are right now,” she explains.
Philanthropic dollars could help with initial costs of research and testing, while return-seeking money can be phased in later. Indeed, banks such as Credit Suisse or JPMorgan could consider co-investing or donating alongside their private banking clients for these early stage projects to build scale for larger financing deals with larger returns down the line.
Impact investment managers are also finding a role somewhere between the philanthropic sector and the banks. Encourage Capital, the Meloy Fund and Althelia are the most established in an, albeit young, sector.
Simon Dent, director of Althelia calls it “the missing middle”.
He says: “Between the NGOs and philanthropists and then commercial businesses that are moving to best practices, there can be a struggle.”
His firm’s Sustainable Ocean Fund is launching soon with $40 million, with a target close of $100 million – up to $20 million of which is from the European Investment Bank (EIB). It focuses on three areas that are in this struggling and missing middle.
The first area is sustainable production, such as fisheries and aquaculture. (Dent points out that 50% of the damage to the Great Barrier Reef has been caused by run-off from unsustainable farming practices.)
The second area is the supply chain.
“Processing, practices and access to certification and technology,” he explains. And the third is conservation and resilience, such as investing in MPAs and ecotourism. These are investments in small and medium-sized enterprises and smaller projects, but they would offer a return.
The Sustainable Ocean Fund is targeting returns in the low teens. Other investors alongside the EIB include Axa Investment Managers, the Inter-American Development Bank, foundations and high net-worth individuals.
Dent says there is room for many more impact investment managers like Althelia, although it helps that the firm already has experience in conservation impact investments. Its first fund was a €105 million pool invested in sustainable forestry and land use.
“There are lessons we learned that we can apply to the ocean fund,” says Dent, such as using the experience of working with cooperatives in fair trade coffee and chocolate when approaching lobster-fishing cooperatives in Belize.
It is Dent’s hope that people like him and Jason Scott of Encourage Capital can provide a model to ultimately bring in institutional “natural capital”.
“The oceans as a theme have been underinvested compared to say education, forestry or healthcare, but we see the oceans as a core part of broader impact investing,” says Dent. “It’s part of climate change, of food security, of health, of poverty and livelihoods.”
Rechberger also points out the underinvestment. “We’re tracking more than 100 conservation funds, but most of them are land-based,” she says. “Those related to the oceans are in fisheries, aquaculture and marine ecotourism, but they are very early stage. We spend much of our time trying to build more investable marine opportunities with other groups.”
With every discussion of how we can bring finance to help solve the ocean’s challenges, there also has to be one on what our capital should not be financing.
|Mike Eckhart, Citi
Mike Eckhart, global head of environmental finance at Citi, makes up a trio, with Huwyler and Arnold, that is championing blue finance in global banking.
Part of the solution, he says, is simply to stop doing the damage: “As an industry and as a planet, the urgency is such that we will have to open a dialogue around how we invest in expanding fisheries and shipping.”
Citi could certainly lead the US banks on good practice in financing for ocean health and security if it chooses to. The firm has already shown leadership in good practice with environmental and social risk management, as well as with firearms in the US. Goldman Sachs and Bank of America are also said to be looking more closely at ocean-related financing.
If we are to truly approach our blue economy as a shared responsibility, then there is room too for shareholders to start making their voices heard. While we have seen shareholder activism around fossil fuel companies, we have yet to see much about shipping, fisheries, deep-sea drilling or mining.
Plastics, however, seem to be on activists’ radars.
In May, nearly a third of shareholders supported a proposal by non-profit As You Sow presented at the annual meeting of food and beverage firm Mondelez International that asked the company to set a time table to phase out non-recyclable plastic packaging.
The company owns brands such as Cadbury’s chocolate, Nabisco and Tang that use materials that are not recyclable. Indeed, non-recyclable pouches of its Tang fruit drink were cited as among the most frequently collected type of waste packaging on a Philippine beach audit last year.
Companies such as Unilever and Procter & Gamble have already agreed to phase out non-recyclable packaging.
Ultimately the challenges facing our oceans are so pressing that we must come together as corporate clients, investors, shareholders, bankers and philanthropists to rethink how capital can be deployed to prevent further damage and to create sustainable solutions.