22 October 2024

The power of additionality: Blue bonds could boost sustainability

By Willem Visser, Tongai Kunorubwe

Key Insights

  • Despite a surge in sustainable debt, the funding gap for SDGs—especially in emerging markets—continues to grow, necessitating innovative financial tools.
  • Blue bonds, targeting ocean-friendly and clean water projects, address underfunded SDGs 6 and 14, offering additional positive impacts in emerging markets.
  • Investments in emerging markets to enhance water resources can help to drive economic growth and advance SDGs like health, reduced inequalities, and gender equality.

Issuance of sustainable debt has exploded over the past 10 years as many investors seek to allocate capital to sustainability efforts while pursuing investment returns. But the amount of annual investment required to achieve the United Nations Sustainable Development Goals (UN SDGs) continues to grow, while the time available to achieve them diminishes. The United Nations estimated in 2023 that an additional USD 4 trillion was needed reach its goals. This funding gap is especially acute in emerging markets countries.

The sustainable debt market size has remained elevated

(Fig. 1) Annual sustainable debt issuance in USD by instrument type

Source: BloombergNEF and Bloomberg Finance L.P. As of June 30, 2024

Climate-related disasters and water scarcity troubles continue to make headlines around the globe, with 44% of humanity (approximately 3.4 billion people globally) having been directly impacted by the greater than 4,600 climate-related disasters that have occurred between 2000 and 20201, 2. At the same time, we edge ever closer to the 2030 target set by the 2030 Agenda for Sustainable Development adopted by all United Nations Member States. Based on decades of work, this agenda serves as a blueprint for global growth and development. The 17 SDGs detail necessary actions to tackle poverty, improve health and education, and encourage economic growth, while also confronting climate change and caring for our oceans and forests.

Additionality—bigger impact potential by zeroing in on emerging markets

The challenge of achieving all 17 SDGs by 2030 is acute. For investors, it means that we must consider ways to gain greater "additionality" from investments to accelerate progress toward the SDGs. Additionality represents the degree of positive impact or outcome that would not have otherwise occurred without additional resources or capital investment. In our view, investments in blue economy initiatives, especially in emerging markets, have significant potential to begin to address SDG funding needs and amplify progress toward the 2030 goals.

"Investing in blue bonds in emerging markets not only addresses local challenges, but also provides greater additionality by driving impactful change where it is most needed."

Blue bonds are a nascent asset type within the sustainable debt market. They are used exclusively to finance ocean‑friendly or clean water projects. Sovereigns, development banks, quasi‑sovereigns, and corporate issuers, among others, can finance projects that align with UN SDG 6 (clean water and sanitation) and SDG 14 (life below water) via blue bonds. SDGs 6 and 14 are currently underfunded.

Blue bonds could help accelerate the growth of the sustainable bond market and facilitate capital flow to address this funding gap. Like its guidance on green, social, and sustainability-linked financing, the International Capital Market Association (ICMA) recently established industry guidance to help investors direct capital toward projects aligned with the blue economy. By enabling investors to deploy capital at scale, asset managers can be a catalyst for such sustainable development initiatives.

Blue bonds can support projects globally, but we see heightened pressures—and therefore opportunities—in emerging market economies where capital is scarce. SDGs are funded at a lower level in emerging markets than in developed markets, increasing needs in those countries. Northern Africa and Western Asia are known water‑stressed regions. Latin America has distinct needs relating to aquaculture and agriculture. Meanwhile, Asia is contending with elevated levels of plastic pollution.

Investing in blue bonds in emerging markets not only addresses local challenges, but also provides greater additionality by driving impactful change where it is most needed. Since emerging markets have contributed the majority of growth in global gross domestic product (GDP) over the past decade, supporting improved water resources can also work to bolster this vital engine of global growth.

Water at the center of achieving many of the SDGs

(Fig. 2) Potential additionality gains from blue investments

As of June 30, 2024.

 

Read full article here

 

Footnotes:

1 Kashiwase, H., & Fujs, T. (2024, April 17). World Water Day: Two Billion People Still Lack Access to Safely Managed Water. World Bank Blogs.
2 WaterAid. (2021, July 6). Mission-critical: invest in water, sanitation and hygiene for a healthy and green economic recovery | WASH Matters.
3 World Economic Forum. (2023, September 13). Achieving the SDGs requires public-private collaboration on water. Here's why.
4 UNICEF. (2016, August 29). Collecting water is often a colossal waste of time for women and girls.
5 Statistics. (2024, February 26). UN World Water Development Report.
6 Climate Change and Water-Related Disasters. (n.d.). UNEP - UN Environment Programme.
7 United Nations. (2024, February 26). The ocean – the world's greatest ally against climate change | United Nations.
8 Wood, K. (2023, September 20). The Ocean Can Play a Bigger Role in Fighting Climate Change than Previously Thought. World Resources Institute.

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