The Role of Ocean Finance in Transitioning to a Blue Economy in Asia and the Pacific
Published: 08 June 2020
Invest in innovative and bankable projects to support healthy oceans and resilient, sustainable blue economy sectors.
The sustainable development of many economies in Asia and the Pacific depends on healthy oceans.
The “blue economy” is an emerging concept that promotes the sustainability of economic activities that use or affect ocean resources.
Ocean finance is essential to transition to a blue economy by defining standards and metrics, developing a pipeline of bankable ocean investments, innovating finance instruments, mobilizing capital, aligning taxes and subsidies, and strengthening policy, knowledge, and capacity.
Why is the ocean so important to the region?
Asia and the Pacific has some of the most diverse and productive marine areas in the world. They provide valuable ecosystem services to poor and vulnerable communities, which bring benefits, such as disaster resilience, livelihood, and food security, as well as drive economies through tourism, fisheries, and aquaculture.
Six out of the 10 largest fisheries in the world are in Asia (the People’s Republic of China, Indonesia, India, Japan, Viet Nam, and the Philippines) and 34 million people in our region are engaged in commercial fishing.
The region’s ocean ecosystems however have been pushed to the brink of collapse. Half of all coral reefs have disappeared, fish stocks and marine species are in decline, the ocean is getting warmer and more acidic, and sea levels are rising. If fish stocks continue to deteriorate as predicted, the implications could be catastrophic for millions of people who depend on fisheries for food and livelihood to survive.
View infographic: Why Healthy Oceans Are Valuable to Asia and the Pacific.
What is the blue economy and the sustainable ocean economy?
The ocean supports many economic activities, which are growing rapidly and projected to reach at least $3 trillion in 2030. Yet, parts of the ocean economy, for example deep sea mining, are undermining ocean health and therefore undermining the long-term viability of the economy.
The portion of the total ocean economy that is sustainable is unknown, partly because there is no universal definition of the synonymous terms “blue economy” and “sustainable ocean economy.” Various definitions have been proposed by the World Bank, European Commission, the Centre for the Blue Economy, and the High Level Panel on the Sustainable Ocean Economy. In simple but inclusive terms, the goal of the blue economy is environmental, social, and economic sustainability of sectors that impact and/or derive economic activity from the ocean.
To further define and support the blue economy, a coalition including the European Commission, World Wildlife Fund for Nature, the European Investment Bank, and the Prince of Wales’ International Sustainability Unit developed the Sustainable Blue Economy Finance Principles. The 14 overarching principles are being adopted by investors, banks, and other ocean economy actors around the world.
The Asian Development Bank (ADB), which is a signatory to the global principles, is preparing an Ocean Finance Framework to be launched in the third quarter of 2020. It will include a typology of blue economy sectors and segments, alongside limitations and boundaries. In the framework, the blue economy includes 1) ecosystem and natural resource management (fisheries, aquaculture, marine and coastal ecosystem management and restoration), 2) pollution control (solid waste management, wastewater management, circular economy, and nonpoint source pollution management), and 3) sustainable development and infrastructure (coastal resilience, ports and shipping, renewable energy, tourism, and community infrastructure). See Figure 1.
Figure 1: Ocean Finance’s Composition, Challenges, and Opportunities to Support the Blue Economy
What are the primary challenges and threats to investing in the blue economy?
Rigorous standards and metrics are required to demonstrate that investments are benefiting ocean health and the blue economy. In the field of green finance, there are several relevant frameworks including the Climate Bonds Initiative, European Commission Sustainable Finance Taxonomy, and the Green Bond Principles. These initiatives are supportive but not sufficient guardrails for blue investments.
The United Nations estimates a global gap of $2.5 trillion annually to achieve the Sustainable Development Goals (SDGs), and while the global funding gap for the blue economy is not yet quantified, evidence suggests that there is a chronic, ubiquitous, and growing funding gap.,, Of all SDGs, Life Below Water (SDG14) receives the smallest amount of blended finance and impact investments.
One key limitation for scaling ocean investments is the lack of investment-ready, bankable projects that are supported by a revenue model.,,, Many important ocean interventions do not have well-tested revenue models.,, Figure 2 illustrates the relative number of projects per segment on the spectrum, from grant funding (zero economic return) through concessional funding to market-rate funding. Note how many segments of the blue economy are better aligned to grant funding, which is small-scale and limited in supply compared to market-rate capital.
Government taxes and subsidies motivate individual, corporate, and collective behavior that can have a beneficial, harmful, or mixed impact on the blue economy. For example, per capita access taxes may reduce the number of visitors to a marine protected area and thereby reduce potential human impacts, benefiting the management goals of the protected area as well as generating revenue. Tax credits for deep sea mineral prospecting however could incentivize new mining activities and increase the negative impacts on ocean health, undermining the long-term viability of that economic sector.
Some taxes and subsidies have an indirect but significant impact on ocean health, particularly fossil fuel subsidies, which increase climate change impacts to the oceans. Some subsidies have complex and mixed impacts. Globally, fisheries subsidies are estimated to be at least $35 billion in 2009 dollars, including $20 billion of subsidies that are labelled as “harmful.” Only 16% of fisheries subsidies reach small-scale fishers, exacerbating the economic viability of this sector and harming food security and resilience for communities., Fisheries subsidies create perverse incentives that “reinforce the poverty trap” and disproportionately impact on vulnerable populations, including women and children. ,
Achieving a blue economy is further limited by the lack of specialist capacity to bridge the sectors of finance and economics with ocean science and management. Specialist capacity is required to innovate and deploy ocean finance instruments, design and structure return-seeking ocean interventions, and intermediate deals.,,,
Figure 2: Project Pipeline of Blue Economy Segments Alignment with Financial Returns
What is the role of ocean finance in transitioning toward a blue economy?
Blue finance (synonymous with ocean finance) can be defined as generating, investing, aligning, and accounting for financial capital to achieve sustained ocean health and governance. A holistic and strategic approach to finance is required to support a blue economy. ADB’s Ocean Finance Initiative includes six objectives to lead the creation of a blue economy in Asia and the Pacific (Figure 3). These six objectives can be more universally applied for a global blue economy, as described below.
Figure 3: ADB Ocean Finance Initiative Objectives
A common framework that includes both rigorous standards and detailed metrics for investments is essential. The Blue Natural Capital Positive Impacts Framework and technical guideline for blue bonds are useful aids. ADB’s Ocean Finance Framework could be used as a starting point to develop a universal taxonomy.
To increase the number of projects that are ready for finance, there are a growing number of ocean accelerators, incubators, and business plan competitions. For example, Fish 2.0 brings together investors and innovators in sustainable seafood through global and regional competitions. Katapult Ocean invests in start-ups that have a positive impact on the ocean. The new platform investableoceans.com is a virtual marketplace for investment-ready deals, often that have been through an accelerator or incubator. Most of these efforts concentrate on market or near-market rate returns, and deal size is often small (less than $1 million). There appears to be a gap in pipeline development for medium- and large-scale projects for investment by larger institutions, including multi-lateral development banks.
A finance instrument (synonymous with finance mechanism) is an instrument through which funding flows from a revenue source to a beneficiary. There are numerous finance mechanisms currently employed for the blue economy, from the traditional, such as grants, taxes, and user fees, to more innovative structures, such as bonds and payments for ecosystem services,,, A few of the most promising mechanisms that could support the blue economy are described in Box 1.
With public sector funds unable to meet the financing needs for ocean health and the blue economy, it is critical to attract private capital to close the financing gaps. This requires innovative blending and leveraging structures which best utilizes public sector funds to de-risk and catalyze in private capital.,
An example is the ASEAN Catalytic Green Finance Facility in Southeast Asia, which was established under the ASEAN Infrastructure Fund to accelerate green infrastructure investments, including ocean health. It supports ASEAN governments to prepare and source public and private financing for projects that actively contribute to environmental sustainability and climate change goals. It has robust investment criteria in place to ensure each supported project will 1) have substantial and measurable environmental and climate benefits, 2) be financially sustainable, and 3) promote public–private approaches.
Through the use of innovative financing instruments (e.g., two-tiered loan structure) from the ASEAN Infrastructure Fund’s own equity, as well as concessional funds from its partners, it aims to provide public sector financing to de-risk projects through a number of approaches including lowering the project’s weighted average cost of capital, reducing up-front capital investment costs, as well as supporting operational bankability indicators. This reduces risks associated with the initial years of a project’s operations, which in turn makes it more attractive to commercial investors.
In addition, the facility provides ASEAN governments with technical support and tools, such as its Rapid Assessment Study, to help identify, structure, and finance green and blue infrastructure projects. In 2019, the ASEAN Catalytic Green Finance Facility signed a memorandum of understanding with the Government of Korea to support facility in developing and financing oceans health projects. Initial support has already commenced to develop oceans and marine protection finance facilities in Cambodia and Indonesia.
Environmental tax reform is increasing in the Asia–Pacific region. This involves revising fiscal policies to create a situation wherein “economic actors respond to the price signal created by a tax, polluting less and using resources and energy more efficiently.”
Several multilateral agreements include environmental tax reform. SDG 12 (Responsible Consumption and Production) aims to reduce inefficient fossil fuel subsidies. SDG 14.6 aims to prohibit harmful fisheries subsidies. The World Trade Organization Buenos Aires Ministerial Decision (December 2017) urges countries to prohibit subsidies that contribute to overcapacity and illegal fishing. The Convention on Biological Diversity, Aichi Biodiversity Target 3 seeks to eliminate or reform incentives harmful to biodiversity by 2020.
In the Pacific, an analysis of taxes and subsidies impacting the environment was conducted for Fiji, Vanuatu, New Caledonia, and French Polynesia, alongside three regional workshops, and an in-depth analysis for 11 island countries is underway.
The scale of climate change, pollution, unsustainable development, and overfishing in Asia and the Pacific requires strong governance and catalytic knowledge solutions to restore and protect ocean health. However, developing economies in the region have different levels of enabling policies, global competitiveness, technological readiness, innovation, and availability of research and training services to tackle these problems.
Strong enabling policies are required to support sovereign spending on ocean health and to promote private sector investments. Many innovative finance instruments require new legislation and regulations to be effective. Governments have a role to play in developing both sovereign and non-sovereign pipelines of bankable ocean projects. In addition, strengthening government fiscal policies is key to aligning taxes and subsidies with ocean health.
For example, the ASEAN Catalytic Green Finance Facility, together with other knowledge partners (i.e., the Government of Korea, Infrastructure Asia Singapore, WEF SDIP, OECD), strengthens the capability of ASEAN governments to create commercially viable blue economy infrastructure projects. This includes training programs; in-country, regional, and international roundtables and events; and knowledge products. The intention is to help countries develop their respective green (inclusive of blue economy) frameworks, models, and planning tools.
Box 1: Example Innovative Finance Instruments for the Blue Economy
Blue bonds. Proceeds of this fixed-income debt instrument are invested into projects that meet the bond criteria. Blue bonds can generate jobs, economic growth, and healthy oceans by investing in fisheries, marine and coastal tourism, coastal pollution and circular economy, marine renewable energy, and green ports and shipping.
Results-based lending. Also known as sustainability-linked loans or impact loans, results-based lending is a debt instrument in which the financing and sometimes the interest rate are tied to the delivery of specific environmental, social, and governance (ESG) targets. This asset class is growing much more rapidly than green loans and bonds. As business faces increasing liquidity shortages due to the coronavirus disease (COVID-19) pandemic, there is an increasing opportunity to use these instruments in a blue economic recovery.
Ocean Risk Insurance. Parametric insurance products, such as coral reef insurance, may address ocean risks, including loss of income in fisheries or performance shortcomings of new technologies. Subsidized insurance premiums may be used as a reward for environmental compliance.
Payments for Ecosystem Services (PES). By capturing and monetizing benefits from marine ecosystem services, PES schemes help to pay the protection and management costs of marine resources. For example, coastal mangroves often provide the service of filtering contaminated water before it enters the coastal ocean; a marine tourism provider operating in the coastal ocean could pay for this service through voluntary or regulated payments.
Asian Development Bank (ADB). 2019. Action Plan for Healthy Oceans and Sustainable Blue Economies. Manila.
ADB. 2019. Oceans Financing Initiative. Manila.
ADB. 2019. ADB Launches $5 Billion Healthy Oceans Action Plan. News release. 2 May.
ADB. 2019. Republic of Korea Pledges $355 Million to Support ASEAN Green Infrastructure and Ocean Health. News release. 4 May.
I. van Wees. 2019. Deep Clean: How ‘Blue Finance’ Can Save Our Oceans. Asian Development Blog. May.
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