‘Sustainable’ debt pioneer ditches controversial ‘blue bond’ label

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A non-profit group that pioneered the use of sovereign debt to raise money for marine conservation has said it will ditch the “blue bonds” label, a term that has been criticised for overstating its environmental impact.

US-based The Nature Conservancy has set up deals worth at least $1bn as part of its “blue bonds programme”. The deals aimed to cut debt costs for Belize, Barbados, the Seychelles and Gabon using capital and risk guarantees by donors, including multilateral development banks, while channelling some of the savings towards protecting these countries’ coastlines.

The Financial Times reported last week that TNC’s most recent debt-for-nature swap, arranged by Bank of America for Gabon, had faced criticism because $500mn of bonds issued to finance the deal were described by the bank as “blue”. That was despite the fact that the capital raised for the loan was to help Gabon refinance general purpose debt rather than being ringfenced for conservation.

Gabon separately promised to spend at least $125mn of the savings on debt repayments to enlarge a marine reserve and strengthen fishing regulations.

The “blue bond” label meant that asset managers could buy them for their sustainable investment portfolios. The west African country has been looking for ways to monetise nature conservation but still relies on its oil industry for more than one-third of government revenue.

The securities were issued by the “Gabon Blue Bond Master Trust” and were described as “blue bonds” in statements to the press by BofA. But in a disclaimer to investors seen by the FT, the bank said it could not guarantee that the description complied with sustainable investing standards that were still in flux at the time. BofA declined to comment.

A coalition of UN agencies and the International Capital Market Association has since clarified in voluntary market guidance that bonds described as “blue” should not be used to finance a country or company’s general purpose debt, meaning that all the money raised from a bond should go towards marine projects. Alternative uses of these labels could cause “confusion”, Nicholas Pfaff, ICMA’s head of sustainable finance, told the FT.   

TNC said in a statement that it would in future arrange “nature bonds”, which are designed to “protect nature and preserve the wellbeing of ecosystems at sea, in freshwater and on land”. The “nature bonds” were, it said, “an expansion of TNC’s successful Blue Bonds model”. 

Slav Gatchev, a managing director at TNC, said the new name better described the organisation’s “expanded approach”, which will focus on land-based as well as ocean conservation. “Perhaps there are also ‘co-benefits’, if you will, in distinguishing our programmes from use-of-proceeds bonds,” he said, referring to debt where all the capital raised has to be used for a specific purpose.

The non-profit group intends to work with ICMA and others to craft “credible standards” for non-traditional green finance deals. 

A person close to TNC said the change was in part linked to the recent controversy around blue bonds, adding that the organisation did not want “semantics to get in the way of real-life action”. It had been in discussions with both ICMA and several investment banks, they added.

Multilateral development banks, which are under pressure to tackle high debt levels in emerging market countries on the frontline of climate change, have repeatedly held discussions this year on how best to scale up and improve on the “debt-for-nature swap” structure first used by TNC in a refinancing of the Seychelles’ debt in 2016.

Simon Zadek, chair of an initiative by Swiss non-profit Nature Finance to build a framework for sustainability-linked sovereign debt, said he hoped TNC’s “rebranding” was part of a move towards standardising “weird, hybrid” deals into a format that investors would accept.