Blue bonds: Investments for the transformation of Andaman and Nicobar Islands

The Andaman and Nicobar Islands act as gateways into Southeast Asian countries. The strait facilitates the movement of over 90,000 vessels per annum, constituting about 30% of global trade - this is only set to grow. The smallest radial distance between ports in the Andaman & Nicobar Islands and ports of the Southeast Asian region is about 50 Km. This gives India an edge in establishing formidable trade relations with these countries. Creating and augmenting world-class supply chain infrastructure can put these islands and the country on a path of economic prosperity. Adopting clean energy while protecting its biodiversity will be key to its prosperity. 

Powering development through clean energy while restoring biodiversity

The Andaman and Nicobar Islands receive abundant sunlight in the equatorial zone. This bodes well for generating distributed solar micro-grids across the islands. Additionally, due to the absence of any significant high-altitude landforms that could have otherwise obstructed the flow of sea winds in the region, near-shore and offshore wind energy parks are another potential source of clean energy. 

The Islands are recognised as a biodiversity hotspot, home to a rich array of unique flora and fauna, including numerous endemic species. However, the region is increasingly threatened by deforestation, climate change, and seismic events, all of which contribute to soil erosion and a decline in biodiversity. Nature-based solutions (NBS) harness biodiversity and natural processes to tackle societal challenges such as climate change, disaster risk reduction, and food security. They offer co-benefits for both human well-being and the environment. NBS include actions like conserving, sustainably managing, and restoring ecosystems, which can make land masses resilient and attract tourism-related revenues to islands.  

Financing the transformation through the issuance of blue bonds

All these new projects need the mobilisation of a massive volume of capital. Financial instruments such as blue bonds and green bonds can be used to mobilise private capital to finance these environmentally friendly projects. Marine-based renewable energy projects such as offshore wind, ocean thermal energy conversion, tidal power, and mangrove restoration are eligible for blue bond issuance. Similarly, inland green energy and NBS projects qualify to issue green bonds. It is worth noting that clean energy projects are commercially viable, and corporations can use green or blue bonds to raise capital with or without government support. However, NBS projects may not always be fully commercially viable. In such cases, the Government of India (GOI) should underwrite these green or blue bonds in case of a default. 

Challenges in the issuance of blue bonds

Over time, green bonds as an instrument have been fairly codified through recognised principles and standards. However, blue bonds are relatively novel. Hence, markets are still developing globally accepted frameworks for identifying the eligibility and creditworthiness of ‘blue’ projects. This lack of certainty may keep investors guessing about their funds' returns and end-use. Presently, there is only a small database of blue economy projects. Moreover, their scale is typically small with complex, long-term return profiles.

Despite the advancement of several remote sensing and on-ground detection systems, measuring blue-projects' precise environmental and socio-economic outcomes is an evolving topic. This allows for concerns being raised about “blue washing”, resulting in tepid interest from potential investors. For example, blue bond issuers claim environmental benefits are more impactful than realised, and non-reporting of unforeseen negative impacts of projects.

How to mitigate these challenges?

To bolster blue bonds, a high credit rating and wider investor interest in these bonds can be ensured by committing a fraction of the proceeds of other conventional projects, not offering environmental benefits, in this region, for debt servicing. This will align with the ‘polluter pays’ principle while expanding the footprint of green assets in the islands. Besides, the central government can offer credit guarantees of blue bonds that can comfort investors. In addition, blended finance models that combine public funds (grants, concessional loans, etc.) and private capital are another way to improve the credit profile of these bond issuers. Public capital can also be used to cover transaction costs, including the cost of certification and monitoring. 

Using cutting-edge technologies like AI/ML/blockchain to monitor the progress and impact of blue-bond financed projects can mitigate the “blue bond washing” risk. The use-of-proceeds bond framework is the best way to mitigate “blue bond washing” risk, as capital can be deployed in pre-defined projects in the bond covenant. The covenant can be structured to impose penalties on the issuer if the risk of “blue bond washing” arises, ensuring that proceeds are genuinely allocated to ocean-related sustainability projects. 

The United Nations recommends three key steps essential for the success of blue bonds from the perspective of “blue bond washing. First, blue bond standards must align with existing global standards; second, there is a need to develop a framework that establishes a ‘blue baseline’ with periodic disclosures of sustainability performance metrics that are measurable and auditable. The final step is the engagement of a second-party opinion maker to verify the framework, eligibility, and disclosure practices of the project -  the report of the second-party opinion maker brings credibility to the issuance of blue bonds. 

Government’s role as a prime mover

The above initiatives can gain real momentum only if the government assumes the role of an active participant in this endeavour. Government agencies must express their immovable commitment to such development opportunities by having their skin in the game regarding financial investments, albeit with a minority stake. This will reduce the real and perceived risks for private sector investors to enter geographies perceived as remote. The participation of the Government as investor can improve the credit profile of these projects, resulting in higher subscription of blue bonds. 

The Logistics Ease Across Different States (LEADS) 2024 report, unveiled by the GOI, categorises the Andaman and Nicobar Islands in the ‘aspirer’ category. The above interventions, powered by Blue Bonds, can potentially catapult them into the ‘pioneer’ category. Financing clean energy deployment, like offshore wind farms, while ensuring marine ecosystem conservation and restoration through issuance of blue bonds can become a model worth emulating by other states in the country. 

This article was first published by the Observer Research Foundation.