The blue bond market emerges as a revolutionary force, presenting a unique avenue to bolster the severely underfunded 'blue economy' and presenting an enticing prospect within the realm of fixed income with untapped impact potential. At the Fiduciary Investors Symposium held at Oxford, Matt Lawton, the portfolio manager of fixed income at T. Rowe Price, pointed out a notable shift in the appetite of asset owners to incorporate ESG through blue bonds. He emphasized that this nascent market offers investors the advantage of being pioneers. Martin Dasek, the senior regional climate finance lead and climate advisory expert at IFC Financial Institutions Group, highlighted that blue bond investments are increasingly gaining the attention of investors. Blue investments have a global reach and touch the lives of a vast number of people working within the marine ecosystem. They not only channel capital into the oceans but also encompass freshwater and inland water sources where pollution like sewage and plastics commence their journey to the sea. In Asia, where the continent is close to the sea and has many sea-dependent economies, blue investments prove to be particularly impactful.

Unlock the Potential of Blue Bonds for a Sustainable Future

Innovation in the Blue Bond Market

The blue bond market offers an innovative means to support the 'blue economy'. It provides a new avenue for investors to engage with and contribute to this critical sector. As Matt Lawton mentioned, the shift in appetite among asset owners to integrate ESG via blue bonds shows the market's potential for growth. This innovation allows for the allocation of capital in a way that not only generates financial returns but also has a positive impact on the environment and society. Blue bonds have the potential to drive change and create a more sustainable future.Another aspect of innovation in the blue bond market is the role of the IFC's Guidelines for Blue Finance. These guidelines provide a globally accepted template for blue finance, guiding the investment industry on what constitutes a blue investment. This helps prevent 'blue washing' and ensures that investments are truly making a difference. The advisory arm of the IFC works with clients ranging from corporates to financial institutions to create sustainable frameworks that kick-start the issuance of blue bonds.

Risk and Returns in Blue Bonds

Due to the focus on emerging market corporates, issuers typically have a low BBB credit rating. However, blue bonds have a 3-4 year duration profile and offer an attractive Sharpe ratio. In highly volatile markets, these bonds outperform and trade more defensively as they are held by long-term investors. Investors should consider allocating to blue bonds as a defensive long-term allocation that can withstand market volatility.Comparisons between a blue bond and a conventional bond issued by the same company reveal that blue bonds trade with an enhanced yield. While they may have less liquidity, investors are paid a premium for holding this illiquidity. Panellists predict that this illiquidity is likely to compress over time as more supply enters the market. Investors in blue bonds primarily focus on the credit risk of the issuer. Returns are not dependent on cash flows from the projects financed by blue bonds, making fundamental underwriting crucial.T. Rowe Price's approach of going out to emerging market corporates allows them to hand-select issuers and projects, finding the most compelling impact. By doing so, they are able to make a meaningful difference in the 'blue economy'.

Growth and Potential of Blue Bonds

The growth of the green bond market serves as a signpost for the potential growth of blue bonds. Just like green bonds in the beginning, blue bonds were not regulated and market awareness was poor. However, with the efforts of investors and asset managers like T. Rowe Price, regulatory support is being provided and key stakeholders are partnering to drive the market forward.Blue bonds are now appearing in developed markets as well, with issuance visible among shipping groups and sovereigns. This allows investors to combine impact and return in different sectors such as the chemical sector, sustainable tourism, sea transport, and port logistics. Investments in these areas require robust frameworks to ensure the delivery of impact and development.The panel emphasized the importance of aligning investors and issuers between impact and financial return. Investors often struggle to find a place for their investments, but with blue bonds, they have an opportunity to make a positive impact while maintaining similar yields and credit ratings.The 'blue economy' desperately needs funding to sustain its existential role in our lives. Despite this, investors have been slow to put their capital to work in this sector. SDG 6 (clean water and sanitation) and SDG 14 (life below water) have only received 5% and 1% of total SDG funding respectively, highlighting the urgent need for more investment.Oceans play a crucial role in producing 50% of the earth's oxygen and absorbing emissions. By investing in blue bonds, investors can contribute to the preservation and protection of these vital ecosystems.