In a world characterised by rapid change, there is an emerging category of debt securities which offers an interesting avenue of capital funding for the socially conscious issuer: blue bonds!
Much like their green (or social and sustainable) cousins, blue bonds fall within the broader context of debt securities with a conscience – i.e., where the proceeds of an issuance of securities are earmarked by the issuer to be used in a manner that has (ostensibly) a positive environmental (or social etc) impact.
So, what are blue bonds? Below follows a brief introduction to the topic.
Blue bonds
Blue bonds are debt instruments whose proceeds are earmarked for funding projects that aim to conserve and protect marine ecosystems. Blue bonds align with an issuer's broader ESG strategy / commitments but are focused specifically on all things aquatic.
A couple of recent examples of blue bond issuances include:
• DP World’s US$100 million blue notes: a GCC first, with proceeds dedicated to sustainable maritime transport and marine conservation.
• The Republic of Gabon’s US$500 million blue bond: the proceeds dedicated to focusing on marine spatial planning and biodiversity.
As with green bonds, the International Capital Markets Association (ICMA) has prepared eligibility criteria for projects which are eligible to qualify as 'blue' – i.e., an issuer of blue securities must use the proceeds of such an issuance for one (or more) such eligible project(s). Examples of eligible blue projects include building / maintaining sustainable marine transport or projects aimed at remedying or minimising the impact of marine pollution.
Legal considerations
From a legal perspective, the issuance of a blue bond follows a similar process to other capital market transactions but requires additional focus on the environmental objectives tied to the funding. The key legal issues include:
Offering documentation
The offering document (e.g., prospectus) must clearly outline the use of proceeds, including procuring that they are allocated exclusively to marine / aquatic environmental projects.
Eligibility of projects – issuer sustainability framework
An issuer of blue securities would need to ensure that the proposed project(s) qualify as 'blue', in line with the eligibility criteria established by the ICMA. The onus of this determination is on the issuer but, in practice, the issuer would be assisted by the relevant arranger bank's ESG team, as well as by independent sustainability consultants (i.e., the party which would issue a third-party opinion on the proposed structure and project(s) - e.g., Sustainalytics).
The issuer must have a robust sustainability framework or blue bond framework that outlines eligible projects, reporting mechanisms, and ongoing compliance monitoring. This framework should be clearly detailed in the bond documentation and must align with the principles and eligibility criteria set out by the ICMA.
Third-party verification and reporting
As mentioned above, a third-party sustainability consultant will be engaged to provide an opinion to bless the proposed structure and use of proceeds. This provides both the issuer and the investors with greater confidence in the legitimacy of the environmental claims.
A key component of blue bonds is the monitoring, reporting, and verification of the use of proceeds. The issuer may be required to provide periodic reports on the environmental impact of the funded projects.
Note, importantly, that a failure by an issuer to use the proceeds of a blue (or green / social etc) issuance for its proclaimed purposes does not constitute an event of default. In the offering document, the issuer will set out its intention to apply the proceeds of the issuance towards the relevant sustainable project, but identify as a risk factor for investors' consideration the fact that this may not actually happen. The impact of any such failure by an issuer is principally reputational (with a potential impact on the price of trading of the relevant securities in the secondary market, although this is more of an investor concern).
Challenges
The blue bond market is still evolving. Certain interesting points to watch include:
Impact measurement and verification
Blue bonds require clear, measurable outcomes to prove the environmental benefits of funded projects. Marine and freshwater projects are often complex, with long timelines for measurable impact (particularly when compared to the more common green / social / sustainable bonds).
Regulatory uncertainty and evolving standards
The blue bond market is still in its relative infancy, and regulatory standards are not as well established as those for green bonds. This can create uncertainty, particularly in regions where environmental regulations may not yet be fully aligned with international standards.
Investor demand and risk perception
Investor appetite for blue bonds is still relatively limited compared to their more established ESG-linked cousins. Some investors may be cautious about the liquidity or transparency of blue bonds or may perceive marine and water projects as riskier due to their complexity and long-term nature, which could impact demand for blue bonds in the primary market and impact the liquidity of blue bonds in the secondary market.
Further information
If this is of interest or should you wish to discuss any facet of debt capital markets, please reach out to the Trowers & Hamlins team.
