The novel type of bond can be used to convert a countries’ sovereign debt into finance. They are modelled on green bonds, which channel their proceeds to climate change and ecological projects.
Convergence, a platform focused on facilitating funding models that blend a mixture of grants and private or public sources, announced yesterday it had awarded a design grant to NatureVest, the investing unit of charity The Nature Conservancy.
NatureVest will use the money to design and structure the blue bond and develop a proof of concept, showing how the bond can be used to raise debt capital from investors to fund multiple debt conversions for conservation.
In this case, the debt conversions will provide funding to the governments of small island nations in exchange for their commitment to improving policies and investing in marine conservation and climate change projects.
If only one country is involved, NatureVest will start by raising a mixture of grant and debt funding, the latter secured through a blue bond. It will then put the funds into an in-country, non-profit trust created by NatureVest for this purpose.
The trust will then purchase a portion of the country’s debt from creditors at a discount, and allow the country to repay it on more manageable terms.
It will then repay the blue bond investors, and use any remaining capital to fund conservation programmes in the country.
This kind of funding model has already been demonstrated by The Nature Conservancy in a recently-closed blue bond transaction for the Seychelles, which will now use the money to fund sustainable fisheries.
The Seychelles is a low-lying archipelago of islands, which, like small island nations, are “among the least responsible for climate change but are likely to suffer the most from its adverse effects”, explained Rob Weary, senior director of product development at NatureVest.
He explained that debt conversions can be used to fund a variety of climate change initiatives, from fisheries management to mangrove restoration.
Joan Larrea, chief executive of Convergence, said the issuance of blue bonds is a “bold mechanism” that will allow NatureVest to “replicate their Seychelles transaction for a number of small island developing states and introduce institutional investors to the asset class”.
Convergence hopes the design grant will help identify the next generation of blended finance models and foster market-wide learning to drive the sector forward.
It plans to award a minimum of $7.5m in design grants to such initiatives within the next five years.