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Water-related investments: thinking beyond blue bonds

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Published: 28 September 2021

Green bonds are very popular, while only a handful of blue bonds were issued in recent years. But that might be changing.

Private investors are looking with increasing interest at water projects in emerging markets. A few weeks ago British bank Standard Chartered announced it had issued loans worth $1.1bn on behalf of the Angolan government to finance a drinking water project in the capital Luanda.

Desalination plant
Desalination plant. The demand for desalination is ‘exploding’. “The costs have decreased dramatically,” says Ger Bergkamp, Head of Business Development at Climate Fund Managers. Nirian / iStock

The $900mn loan is partly backed by a World Bank guarantee and $165mn is from Bpi France, the French export credit insurance agency. The Luanda Bita Water Supply Guarantee Project should provide the capital’s two million plus inhabitants with a better supply of clean drinking water.

This major deal illustrates the growing interest of institutional and private investors according to Ger Bergkamp, Head of Business Development at Climate Investor Two (CI2), the second fund of The Hague-based Climate Fund Managers, a joint venture between Dutch development bank FMO and Sanlam InfraWorks in South Africa.

CI2 was created to stimulate investments in water, sanitation, and ocean infrastructure projects in these markets. It builds on the success of the $850mn Climate Investor One fund, which focuses on renewable energy.

The first closure of the new fund is expected in the coming months. Pension funds, insurance companies and development banks have expressed an interest in participating, which makes Bergkamp confident that CI2 can match the scope of its predecessor.

First blue bonds

So why has the World Bank only identified five blue bonds in recent years? It comes down to how you define blue bonds. The multilateral bank considers blue bonds debt instruments that are specifically meant to raise capital from investors to finance marine and ocean-based projects that have positive environmental, economic and climate benefits.

The first bond that met those criteria was issued by the Republic of Seychelles in 2018. The bond – which raised $15mn from international investors – focused on funding the sustainable use of marine resources.

Two other blue bonds followed, involving projects in the Baltic Sea. The World Bank also launched a fixed rate blue bond to draw attention to plastic waste pollution in oceans.

And last year, the largest blue bond thus far was issued by the Bank of China, raising the equivalent of $942mn. This dual-currency bond was the first blue bond issued by a commercial bank.

That seems to be it so far, while the so-called blue economy is valued at about $3trn annually. That makes it the world’s seventh-largest economy based on GDP supporting the livelihoods of three billion people worldwide.

Demand for water desalination is ‘exploding’

It’s too soon to gauge the market growth rate of blue bonds, as a recent article published by Nasdaq remarked, but ‘the instruments definitely help in raising awareness about important marine issues while providing much-needed funding to projects.’

However, if you look at it from a broader perspective the private sector blue (or water) market already exists. A substantial part of what is labelled as green or sustainability bonds contains water-related elements.

Take water supply sanitation, for instance. The new CI2 fund focuses on projects in two main fields: wastewater (public and industrial) and the actual water supply.

“Wastewater flows ultimately end up in the ocean,” says Bergkamp, “so we definitely feel the blue approach should be broader than end-of-pipe solutions.” Prevention is the keyword here. “Polluted wastewater is a worldwide problem. In fact, it’s crazy that this is still going on. Because it can be solved.”

In terms of the supply of drinking water, the demand for desalination is exploding. “The costs have decreased dramatically,” notes Bergkamp. “We have a pilot project in Kenya at the moment where we are testing the potential of small desalination units to supply clean water to the population.”

Blue bonds’ appeal to private investors?

There is still considerable doubt, however, as to whether water-related projects in emerging markets have sufficient appeal for private investors. Symbiotics, the Swiss-based platform for impact investing, currently sees few market opportunities, citing the lack of profitability for private investors.

Dirk Dijksma, Head of Innovation Investments at Symbiotics, has set up a programme for green, sustainable and social bonds in emerging markets. “Extremely interesting products,” he says, but blue bonds aren’t part of the programme.

“Blue bonds mainly focus on public projects that have a social and environmental benefit. Everyone benefits from this, but the value is difficult to discount directly in a separable cash flow to the project.”

Blended capital to attract private investors

The panacea for that problem seems to be ‘blended capital’: the combination of public and philanthropic funds with private investments. The World Bank’s involvement in the Standard Chartered project in Angola is a case in point.

CI2 is also structured as a blended capital fund. By working with concessional money and risk guarantees, institutional and private investors are guaranteed an acceptable annual return on investments.

The new fund also adheres to Climate Investor One’s proven ‘whole-of-life’ financing methodology. That means finding finance for every stage of a project, starting with the development phase.

“Developing a good idea into a sound project is always the most difficult phase to find funding for. By financing feasibility studies with public money we eliminate these risks for developers and companies and make it much more attractive to get in on the act.”

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