• The blue bond market is set to grow in the coming years, but there are constraints on the path ahead.
• Major players include private companies and development banks; so far, governments have shied away from it.
• The market remains smaller compared to the larger green bond market.

The blue bond market is taking on a wider popularity as a means of financing marine projects globally, with blue bonds worth $2.5 billion issued in 2024.

Here is a brief guide to help you understand why the blue bond market is in vogue and how institutions are using it to fund marine projects.

What Is a Blue Bond and How Does It Work?

It is a form of debt instrument that helps raise money to fund specifically ocean-friendly projects.

Just like traditional bonds, investors lend money to an issuer; here, the issuer could be governments, banks, or any other company, which, in turn, agrees to pay the money back with interest. The main difference between traditional and blue bonds is that the funds raised through the latter are used to protect and conserve marine ecosystems.

For example, they are issued to finance sustainable fishing practices, coral reef restoration, cleaner shipping operations, and eco-friendly tourism projects.

READ MORE: What are ESG Bonds? All You Need to Know

However, the blue bond market is smaller in comparison to the green bond market. Seychelles, an East African country, issued the first blue bond in 2018 to expand marine protected areas. The market started picking up after that, but growth has been at a snail’s pace.

In 2024, the market pegged blue bonds issued at about $2.5 billion, which represents a 10.6% increase from the year before, but this figure is less than 0.5% of all green bonds issued globally, according to data provider ICE.

This trend signals that, although there is an uptick in interest, the blue bond market is still nascent.

Globally, governments have so far stood away from embracing blue bonds, except for Seychelles. The only country to follow in Seychelles' footsteps is Indonesia, which raised $150 million through them for coastal restoration.

To fill this gap, multilateral financial institutions, including the World Bank, have come to the fore by issuing around $2 billion in blue bonds to back marine projects.

ALSO READ: Money Meets Mission: The Climate Fintech Revolution

On the flip side, private companies are substantial in the market, with up to $9 billion raised so far. These private players include Asian banks and businesses whose success hinges heavily on the ocean economy, such as shipping and offshore wind companies.

For instance, Ørsted, a Danish company, raised €100 million to cut marine pollution; DP World in Dubai raised $100 million to reduce the environmental impact of its ports; and Japan’s Mitsui OSK Lines raised ¥20 billion for similar purposes.

To finance ocean projects, blue bonds are not the only option available to businesses; instruments like debt-for-nature swaps are also used, where a nation's debt is refinanced or restructured with the proviso that some savings are invested in environmental conservation. Countries such as El Salvador, Belize, Barbados, Gabon, the Bahamas, and Ecuador have used this approach before for marine protection.

Besides, sustainability-linked bonds (SLBs) also have potential for ocean financing, but they largely remain underutilised. How do they function? Well, they tie interest rates to specific performance goals — for example, sustainable fishing practices. If the issuer fails to meet the goal, they end up paying a higher interest rate.

The blue bond market is expected to grow in the coming years, but there are challenges to be addressed. Investors in the market so far include pension funds, insurers, development banks, and philanthropic organisations. However, dedicated investment funds in this area have struggled to attract external investors.

ALSO READ: Blue Carbon: Japan to Store CO₂ in Deep Sea with Marine Plants

For the blue bonds market to augur well in the future, it is contingent on factors including clearer standards, better data, and national plans for ocean protection. To build investor confidence, a framework published by the International Capital Market Association could come in handy.

If blue bonds grow as fast as green bonds, yearly issuance might reach $14 billion by 2030. Even at that pace, they would still represent only a small fraction of what’s needed to protect the world’s oceans under the United Nations’ 14th Sustainable Development Goal.

Ends/

Want to boost sustainability across your business operations? Discover our ESG Marketplace, home to over 700 providers delivering a range of ESG and sustainability services.

Stay informed with the latest insights by following KnowESG’s Sustainable Finance News.

Explore our recent ESG Event updates.

Source: Financial Times