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24 Nov 21

Can blended finance stimulate a sustainable ocean economy?

Can blended finance stimulate a sustainable ocean economy?

Originally published on the Economist World Ocean Summit Asia-Pacific speaker blog.

The world’s oceans are one of our most valuable natural resources. The size of the global ocean economy was estimated at $1.5 trillion in 2010 and is projected to increase to $3 trillion by 2030. However, climate change and the unsustainable use of ocean resources threaten the future health of the ocean and the incredible value it generates.

The investment necessary to support the sustainable development of the ocean economy is sorely lacking. Over the past ten years, only $13 billion has been invested in ocean sustainability through philanthropy and official development assistance, with very little from the private sector. To put this into context, the impacts of climate change on the ocean could cost an additional $322 billion a year by 2050 if we don’t do enough to mitigate the effects of global warming.

Marine funding by source

Making oceans investable

One of the key barriers to investing in a sustainable ocean economy is the relatively high risk of projects in this sector. This is often coupled with new underlying business models with unreliable or untested revenue streams. The resulting risk-return profile can make deals unpalatable for many commercial investors. So how do you turn this profile on its head and appeal to investors?

Blended finance is one possible solution. Convergence, the global network for blended finance, defines it as the use of catalytic capital from public or philanthropic sources to increase private-sector investment towards the Sustainable Development Goals (SDGs).

Capital as a catalyst for change

Catalytic capital—capital from public or philanthropic investors that is impact-oriented and not seeking market-rate returns—can be strategically used to provide risk protection or enhance returns, making investment terms more attractive to commercial investors. But despite these advantages, only about 1% of total blended-finance flows in emerging markets is directed towards SDG 14: Life below water.

One reason for this may be that there are very few investments at scale in this space (that is, investments above $100 million). However, there are signs that this is changing, and we can point to two examples of deals that have achieved scale: Mirova’s $132 million Althelia Sustainable Ocean Fund, which invests in three key areas of the blue economy (sustainable seafood, the circular economy and ocean conservation); and the $106 million Circulate Capital Ocean Fund, which incubates and finances companies and infrastructure that prevent ocean plastic in South and South-East Asia. Both of these funds rely on catalytic capital in the form of a risk-sharing guarantee by the US Development Finance Corporation (formerly the Development Credit Authority of the US Agency for International Development).

Light on the horizon

At Convergence we have seen increasing momentum in the market for transactions using blended finance to support ocean-economy projects. Our unique perspective stems from the insights we have into deals that are about to hit the market, through our market acceleration and design funding programme, and those that are currently fundraising, through our deal platform. These two channels show us that an increasing number of deals focused on financing SDG 14 are under development or are fundraising, giving us a glimpse into a future where more financing is flowing into the ocean economy.

Through the Convergence Asia Natural Capital Design Funding Window we have provided early-stage grant funding for the design of a number of blended-finance solutions that are developing new business models to draw private capital into the blue economy. For example, we providedmade a proof-of-concept grant to Blue Finance to design a financing facility for the effective management of marine protected areas (MPAs) in Asia-Pacific. Market opportunities for the MPAs to generate revenues will be developed through tourism, blue-carbon credits and community small-business models such as responsible aquaculture.

Another example in Asia-Pacific is the Restoration Insurance Service Company (RISCO) for Coastal Risk Reduction, led by Conservation International, which will develop a financing structure to work with insurance companies to incorporate the value of mangroves into insurance products through fees and carbon credits that support community-based restoration and conservation efforts.

In addition to the Convergence Design Funding programme, there are projects such as IUCN’s Blue Natural Capital Financing Facility, which provides early-stage funding to develop investable projects specifically for blue natural capital. The grant window of the Global Fund for Coral Reefs seeks to create a pipeline of bankable projects for coral reef conservation and resilience.

In addition to piloting new business models for financing the blue economy, we also see traction in the use of more traditional blended-finance structures such as funds that are targeting the blue economy. For instance, Climate Fund Managers, building on its first fund focused on sustainable infrastructure, is launching a second to provide integrated funding solutions for commercially viable water, sanitation and ocean projects in emerging markets. Meanwhile, Aqua-Spark has an open-ended investment fund that is focused on investing across the aquaculture value chain.

Moving forward

While it is heartening to see increasing momentum in blended-finance structures for financing the ocean economy, it is not enough. As oceans continue to warm and sea levels continue to rise, we’ll need to see much more financing for the ocean, and more transactions at scale that can draw in the capital needed to keep our ocean healthy and sustainable. In the lead-up to COP26 it is imperative that public, private and philanthropic capital work together to ensure that investment mobilisation for the ocean is accelerated.

The global conversation about accelerating a sustainable ocean economy will continue at the World Ocean Summit Asia-Pacific, running virtually on December 6th-10th 2021. Hear more from Adhiti Gupta during a blended-finance panel discussion on December 9th.

About the Author
Adhiti Gupta

Adhiti is the Associate Director of the Market Acceleration & Design Funding team at Convergence. Prior to Convergence, Adhiti advised funds, family offices and foundations making impact investments in developed and emerging markets while working at RPCK, a boutique law firm in New York City. Adhiti has also practiced in India, where she advised on cross-border M&A transactions and private equity/venture capital transactions. Adhiti also counseled social enterprises as a consultant with Accion Microfinance Council and a project manager with Columbia Impact Investing Initiative. Adhiti holds a master’s degree from Columbia Law School, and a law degree from National Law School of India University. She has been awarded the Temasek Foundation Leadership Enrichment and Regional Networking Award by the National University of Singapore.

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