Solving the water crisis requires abooming blue bond market
Emerging markets face an uphill battle against issues
such as water scarcity, droughts, and polluted oceans.
Blue bonds offer a sound investment instrument to help
fund solutions. However, this bond market remains relatively
small. “Expanding the blue bond market can help achieve awater-secure future for all. Time is of the essence; by 2050,
oceans are projected to contain more plastic than fish,”states Matt Lawton, portfolio manager of a global impact
credit strategy at T. Rowe Price.
Water is life. The health of the world’s oceans is critical forbiodiversity, climate regulation, and supporting the livelihoods ofmillions globally. Oceans also provide a vital source of protein for
3 billion people and play a significant role in mitigating climatechange. Therefore, it is very concerning that oceans are facing
unprecedented threats from pollution, overfishing, and theeffects of climate change.

Currently, the world is also experiencing a growing crisis in
freshwater resources for people, animals, and agriculture.
According to Unesco, roughly half of the world’s population
faces severe water scarcity for at least part of the year. Domestic
demand particularly, has been soaring.
Governments in emerging markets are awakening to these
problems and have begun investing in solutions. However,until now these initiatives remain a drop in the proverbialocean. Lawton: “What complicates matters is that we are ina significant period of sovereign debt distress in emerging
markets, possibly the most significant in the industry in the last
30 or 40 years. The public sector’s balance sheet is constrained
due to high debt burdens and interest rates. Private sector
projects and investments are indispensable. However, private
initiatives to raise capital for water-related investments havebeen few, and available funds are scarce.”

Increase in water withdrawals for different sectors, 1960-2014

Source: 2024 UN World water development report: water for prosperity and peace. (https://www.unesco.org/reports/wwdr/en/2024/s)>

For investment professionals only. Not for further distribution.

ESG bonds are a great funding mechanism forsustainable solutions

Establishing a well-regulated, promising blue
bond marketProper funding is essential for addressing sustainability issues.
Bonds whose proceeds are used for sustainable solutions are
a popular vehicle for such funding. These instruments directly
link funding to sustainable projects, such as renewable energy,
providing investors with financial returns and tangible impact.

As with green bonds, the blue bond market faces an important
challenge: “bluewashing”. Bonds that are unjustly branded assustainable without substantial environmental benefits, canprofoundly impact the trust investors have in a new and upcoming
market. Lawton: “Unfortunately, we already have seen instancesof bluewashing where companies have fallen short of living up to
their external messaging or external promises. The last thing you
want to see as an impact investor is that the bond proceeds areused for something that isn’t even remotely impactful.”

ESG bonds, including sub-labels such as green bonds, socialbonds, and sustainability bonds, have rapidly matured intorobust financial markets. Lawton notes, “Over the years, theuniverse of issuers has expanded both in depth and breadth.
We now see ESG bonds in diverse markets, from sovereigns tocorporates to development banks and asset-backed issuers.”
Green bonds, focusing primarily on climate-related projects,
are the most popular category. The green bond market began
in 2007 with the European Investment Bank issuing a climate
awareness bond to fund environmental projects. “Since then,we’ve witnessed tremendous growth, advancement, andinnovation within the green bond market,” states Lawton.

Blue bonds: a rallying point for issuers
and investors
Blue bonds essentially expand upon the green bond concept,
specifically targeting water and marine projects. These projects
may include ocean clean-up efforts, sustainable fisheries
management, water pollution control, and the development ofbetter and cleaner water infrastructure.
Lawton believes that blue bonds are essential for funding
solutions to the water crisis. While green bonds have madesignificant strides in funding renewable energy and low-carbon
projects, they have overlooked the specific needs of marine
environments and water scarcity. “Approximately 98 percent ofgreen bonds are related to climate. If we want to finance waterspecific projects, investors and issuers need to focus. As waterdedicated bonds, blue bonds can ensure that pressing water
issues receive attention and funding. As a standalone category,they can act as a rallying point for issuers and investors, creating
momentum to address a pressing water crisis.”

A label alone does not guarantee the quality and authenticity
of a bond. Therefore, rigorous reporting standards, stringent
certification, and transparency are necessary to ensure
the authenticity of projects funded by blue bonds, Lawton
emphasizes. “This was a critical development for the successof green bonds. In addition to regulation, industry groups suchas the International Capital Markets Association (ICMA) haveprovided guidelines to the markets, particularly around impact
reporting and measurement.”
T. Rowe Price is partnering with the International FinanceCorporation (part of the World Bank Group) to grow the blue
bond market to address the planetary and societal risks posedby the current underfunding of the blue economy.
Lawton concludes, “We firmly believe that investors can andshould play a role in addressing our global water crisis andwould welcome other asset managers in this segment.”
T. Rowe Price and the International Finance Corporation are
not affiliated companies.
General source: https://www.unep.org/news-and-stories/
story/shortages-mount-countries-hunt-novel-sources-water
All investments are subject to market risk, including thepossible loss of principal. Blue bonds carry investment
risks, which include credit risk and interest rate risk.
Emerging markets are less established than developed
markets and therefore involve higher risks.

The first challenge is to increase the issuance of blue bonds.
Worldwide it’s still only approximately US $6 to 8 billion in termsof blue bond issuances, depending on how one categorizes selflabelled blue bonds. This pales in comparison to the size of theESG bond market, predominantly green bonds, with $4 trillion
in outstanding debt. This represents a tenfold increase from a
decade ago, according to the Climate Bonds Initiative.
(https://www.climatebonds.net/2024/01/welcome-2024)
Lawton is confident that blue bonds can follow a similar
growth trajectory. “There is currently an investment demandof $90 billion. In my experience, supply follows demand. Thefinancial sector is increasingly enthusiastic about ocean-friendly
projects and critical clean water resources protection. Water
is a unifying theme; everyone recognizes its importance. Just
as with green bonds, the growth potential of blue bonds isimmense. This market is at a tipping point.”2

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