Attention on polluted seas is leading to discussions about how to marshal capital to clean them up
- There are moves to incentivise attempts to clean up ocean areas for financial benefit
- Potential revenue streams include dredging levies, tourism and grants
- Legal rights and responsibilities need to be established in international waters
- Moves to finance such projects in small island communities
Salt marshes around the Taw and Torridge river estuaries in North Devon, south-west UK, disappeared long ago due to land reclamation. However, a pilot programme considering conservation in the area has indicated they have potential to be restored as “blue carbon” (marine-based carbon offsets).
The scheme, known as Marine Pioneer, was established by the UK government in 2017 and has several objectives, including the formation of plans and mechanisms for prioritising investment to restore natural capital, and the development and implementation of innovative finance opportunities.
The scheme is one of several worldwide projects considering ‘blue finance’ – philanthropic or private sector finance to counterbalance ocean pollution and support coastal conservation. It would be premature to suggest this constitutes a coherent set of investment vehicles but efforts are under way.
“One needs to be cautious but it is worth considering and testing out the possibilities,” says Robin Smale, director of Vivid Economics, an economic consultancy. The company was commissioned in 2018 to model marine-based conservation and coastal economic development finance to manage a Marine Protected Area (MPA). The UK government set up these zones in 2011, as part of a chain of marine conservation areas further afield. The pilot evaluated the potential for national MPA funding.
“It works best when politicians across parties are helped by a civil service over the long term because of the short-term political cycles in democracies” - Alistair Perkins
Among the financial possibilities analysts considered were both marine-based carbon and biodiversity offsets – projects producing a net gain in the biodiversity impacts of big business operations. Salt marshes offer such an opportunity, allowing offset buyers to participate in the international campaign to clean up the seas. That is because salt marshes are an effective form of carbon storage.
The investigation for North Devon also looked beyond individual offsets. The designated boundaries of the MPA provide a useful basis for visualising a cluster of both marine-based businesses and conservation projects that could be aggregated into an investment fund. Such a collection of businesses could be used to attract impact investors or, if several MPAs were grouped together, as part of a specialist portfolio for ESG investors.
In addition to the sale of biodiversity or carbon offsets, the study also identified other revenue streams that could form part of the offer. These include levies collected from dredging, tourism activities like wildlife watching, and traditional sources such as grants. This revenue would be used to conserve the protected zone. “This doesn’t happen at the moment because there is no focus and no money to do it. Public funding for conservation varies and is under pressure”, says Smale.
To contain these activities, Vivid Economics suggests a place-based portfolio model, in which an MPA would be transferred, typically via a long-term lease, to a charitable trust with principal activities managed by a dedicated social enterprise.
Due to the innovation behind the project, however, it would face a number of barriers. For example, legal matters concerning ownership would have to be resolved because many of the coastal beaches belong to different landowners, who would have to co-operate.
Deeper issues on the high seas
In the deeper ocean, the problems are of another order. The high seas, situated more than 370km from national coastlines, are a lawless area owned by no-one. Hence, legal definitions for the purposes of conservation finance need to be developed.
“One of the challenges of ocean finance is property and territorial rights. These are not articulated, for example, to define who finances, who gains from a project and who is responsible. But, it is a challenge that could produce projects with a multiple combination of partners,” says Charles Donovan, director of the Centre for Climate Finance and Investment at London’s Imperial College Business School.
The need to scale up projects will create headaches, even for insurance companies that may be considering funding natural conservation, because many sites are individually too small. Donovan says: “There’s lots of revenue potential, for example in the protection of coral reefs. But is there scalability for blue finance? That’s an open question we’re still working out.”
Blue bonds make a debut on the global financial stage
Two projects have recently been added to the global portfolio of ‘blue finance’ projects. In October 2018, the Seychelles launched the world’s first sovereign blue bond, which will support sustainable marine and fisheries projects. The bond raised $15m (€13.1m) from international investors.
The World Bank developed the bond assisted by Calvert Impact Capital, Nuveen and Prudential Financial. It is partly guaranteed by the International Bank for Reconstruction and Development (part of the World Bank) and supported by a concessional loan from the Global Environment Facility, a grant-making body that will partly cover coupon payments for the bond.
Meanwhile, Mirova – an affiliate of Natixis Investment Managers – announced the first closure of its Althelia Sustainable Ocean fund in September 2018, its second fund dedicated to scaling responsible natural capital investment strategies. This fund concentrates on impact investments into marine and coastal projects, and is open to additional investors for a further year.
Mirova states that it invests in scalable businesses that harness the ocean’s natural capital to generate real assets, build resilience in coastal ecosystems and create sustainable economic growth and livelihoods. The fund intends to deploy at least $100m into sustainable marine activities in developing countries, starting with Latin America and the Caribbean. Returns are generated from loan interest, profit shares or the sale of equity.
Two non-governmental organisations, Conservation International and the Environmental Defense fund, are engaged as strategic partners to maintain the highest environmental standards. At launch, the Sustainable Ocean fund attracted investments from the European Investment Bank, AXA Investment Managers and FMO, the Dutch Development Bank, as well as US-based family offices and foundations.
The US non-profit organisation, The Nature Conservancy (TNC), has resolved scalability by adopting a different prototype from the bottom-up approach of the UK government. TNC is among those driving the concept of ‘blue finance’. It has been working directly with the Seychelles government to improve its marine environment by creating a trust through its own grant and loan capital.
The trust extends loans to the Seychelles government to purchase sovereign debt at a discount, and the Seychelles government repays the trust on more favourable terms than its official creditors. The trust repays loan capital and uses remaining funding – grant capital and discount on debts – to fund marine conservation and climate adaptation activities. The first transaction, which closed in 2015, amounted to $21.6m (€18.9m). While there may be limited potential for such projects for mainstream asset managers, imaginative banks might engage.
“We are initially concentrating on small island developing states such as archipelagos in the Indian Ocean or Caribbean, but also looking at coastal countries in East Africa” - Rob Weary
“Commercial banks seem to have plenty of low-cost funding to lend to us,” says Rob Weary, senior director of product development for NatureVest, the TNC conservation investing unit. The concept has proved workable, so that spin-offs are in the pipeline. “We are initially concentrating on small island developing states such as archipelagos in the Indian Ocean or Caribbean, but also looking at coastal countries in East Africa,” he says.
As resource pressure rises through population growth and consumerism, the marine environment has entered the public consciousness, and previous loopholes are being addressed. A decade ago, few MPAs even existed, but policy has already moving ahead. In September 2018, international negotiations began on a UN treaty to decide how to protect the high seas by setting aside conservation areas and establishing rules for activities like deep-sea mining.
Such foundations will provide a solid framework for financial plans. There are radical opponents to these ideas. The regulatory stick, they say, is the most appropriate response to pollution. But, the continuous contamination of marine environments by plastics and other substances may mean that opportunity passed long ago.
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