To save the oceans and reform unsustainable fisheries, we need the help of private investors - and on a huge scale. This is an idea that many international conservation organisations and investment banks have been promoting for years, including the likes of Credit Suisse, who now hosts an annual conference on ‘conservation finance’ from its New York offices.

Many reports have been written on the business case for private capital markets to finance ocean conservation and fisheries reforms. The arguments are very simple: governments don’t have the resources to fund conservation, and the traditional sources of extra finance (coming from donors and philanthropists) are completely inadequate. Conservation and fisheries reform should therefore be more open to private investors - who have a great deal of money. Investing in conservation and fisheries reforms is lucrative - sustainable fisheries will increase the wealth potential from the seas, and therefore can give investors a good return on their money.

There are many proposals on how to attract millions of dollars for marine conservation from private investors. One of them is for governments and companies to issue blue bonds. This is in fact a well established strategy - the World Bank and the European Investment Bank started issuing ‘green bonds’ in 2007/8. These raise money from private financial markets which is then ring-fenced for specific green projects and activities. The green bond market has done exceptionally well - last year, governments, multilateral development banks and companies raised 130 billion USD through green bonds - nearly twice as much as they did in 2016.

This year, the concept of a “blue bond” has finally become reality. The Seychelles has announced its intention to issue the world’s first blue bond, with the help of the World Bank and the UN’s Global Environment Facility. It is likely that the Seychelles blue bond will be quite small - 15 to 20 million USD. But the importance is that Seychelles is being used as ‘proof of concept’. The hope is that other developing and small-island coastal states will follow its example. Indeed, last year Fiji issued the first national green bond for a small-island developing state, and Nigeria also issued its first green bond. NatureVest - a US based organisation set up by JP Morgan and The Nature Conservation to specialise in leveraging private capital for conservation - thinks that in 10 years they will be selling a billion USD of blue bonds.

The dangers of the blue bond market?

Raising funds through international capital markets could end up delivering the promised “triple win outcomes”: good for the environment, good for poorer communities, and good for the investors. But is this model safe to replicate?

So many organisations are supporting conservation finance in general, and the concept of green or blue bonds specifically. There are many reports describing how these are vital if we are to save the planet. Yet hardly any of these consider what might go wrong. In CFFA’s publication on blue bonds, we set out the reasons why the blue bond market are not attractive for small-scale fishers, and why the claims made about blue bonds are dubious.

Credit Suisse and the first tuna bond

The report includes a case study from Mozambique. Mozambique raised 850 million USD to finance the launch of its national tuna fishing company, dubbed by others as the world’s first ‘tuna bonds’. At first glance, this has nothing to do with blue bonds. However, just like a blue bond, the issuer claimed the money would be spent on sustainable fishing and the funds will have an enormously positive outcome on the national economy. The bond was financed and arranged by Credit Suisse, in collaboration with other European and Russian banks, some of whom also support conservation finance and green bonds. In fact, in 2013 - when Credit Suisse was finalising the arrangement for Mozambique’s tuna bonds, the bank was working with WWF and other conservation organisations on initiatives such as 50in10 and the Global Ocean Partnership. It is a bank that was - and still is - at the forefront of a global campaign to raise ethical financing to save the ocean.

The tuna bonds did bankrupt Mozambique. They also provided millions of dollars in fees for Credit Suisse and other banks, accounting firms and lawyers. The tuna bonds were issued in secrecy and have led to a range of concerns about high level corruption and conflicts of interest. The prospectus for the bonds - sent out to investors but kept confidential - was deceitful and it massively overvalued the business proposal. Mozambique’s tuna fishing company and the expensive fishing vessels it bought from France, do not generate enough income to pay off the investors or pay its workers. Mozambique has defaulted on its repayments, and is struggling to get a bailout from the IMF. Remarkably, the case of Mozambique does not seem to be discussed at Credit Suisse’s annual conferences in New York, when the network of bankers and conservation organisations come together to plan how to promote blue bonds and other innovative financial instruments.

Mozambique is an extreme example of the risks of ‘sovereign bonds’ - whereby governments raise money through international capital markets. But Mozambique is not the only example. In the last decade, more and more African governments have decided to raise cash through the bond markets. Before 2006, only South Africa had done so. But by last year, African governments accounted for 40 billion USD in bond debts; meaning bonds have become almost as important for African governments as development aid. The Seychelles, Ghana, the Democratic of Congo and Mozambique have been the first countries to default on these debts, but there is a growing concern that others will follow.

So why should we be concerned about a growth in the blue bond market? Our report raises the following issues:

Countries can easily raise too much cash through bonds - leading to unsustainable debt.

This is a risk made more likely where valuations on potential returns lack credibility. This is an aspect that characterises fisheries - there are now many reports that claim the wealth from the oceans is massively under appreciated, and if developing countries could impose better management and deal with illegal fishing (and sell blue carbon credits) - then governments could make millions of dollars in extra taxes and levies. The trouble, however, is that these projections on the enormous wealth potential of the oceans have often been based on dodgy statistics, and they rely on a fantasy, whereby African governments can easily develop their ‘blue economy’ into a sustainable cash cow that will then fund pro-poor and environmentally friendly development.

As it is, exaggerated and simplistic reports on the wealth potential of the oceans could easily be used in the prospectus sent to investors, who end up believing that the government is in a good position to earn enough money to pay back the debts, when they are clearly not.

In fact, deciding how much money to raise in bonds is not always based on the likely economic returns for the bond issuer. In Mozambique, Credit Suisse originally raised 500 million USD for the tuna company. But they found there was a strong demand among investors, so a further 350 million USD was issued. The case is much worse than that - Credit Suisse ended up issuing 2 billion USD in bonds for Mozambique, which included raising cash for two other companies that were set up to provide monitoring and control of the country’s EEZ. There was no information made available to investors that might convince them 2 billion USD was not a viable investment, although because the government of Mozambique had guaranteed the loans, investors were probably not too worried.

Overvaluing bonds means the country may default on repayments, which means it is forced into debt restructuring (as is the case in Ghana and Mozambique), which tends to harm service delivery for the poor. Alternatively - and possibly more likely for ethical bonds - the government relies on other income streams to make up the shortfall. In Africa, by far the largest source of foreign cash available to governments is from the export of primary commodities, such as from oil, gas and mining, or fish. Blue bonds - as with green bonds - may not be very sustainable debt, meaning there is pressure to promote other polluting industries to compensate.

This risk of bonds may seem similar to other forms of government borrowing, such as concessional loans from development banks. However, bonds are far more expensive for developing countries - they have much higher interest rate payments, and also much higher fees for the bank managers. Unfortunately, the drive to encourage developing countries to raise more money on private capital markets, which is a policy promoted by so many aid agencies often under the guise of ‘blending private and public finances’, may be causing a reduction in concessional loans and aid grants.

Bonds are at risk of corruption and fraud

The ease in which governments can raise too much money from bonds makes them vulnerable to corruption. This is also facilitated by the lack of transparency that seems to be a characteristic of bonds. Again, Mozambique is possibly the stand out example, but there have been others. Tanzania raised 600 million USD in 2013 from issuing a sovereign bond. Yet investigations found that the lead bank manager - Standard Bank - colluded with Tanzanian authorities to increase the bank fees for the bond, which was then used as money to pay a kick back for being awarded the deal.

National bonds are not normally used to fund a specific project, but are rather sums of money that are distributed to a range of projects based on an eligibility criteria. There is a great deal of discretion in how the proceeds are used. Conflicts of interests and kick-backs are therefore inherent risks. In theory, ethical bonds may come with higher standards for accountability and transparency than other types of bonds. Indeed, voluntary standards on green bonds focus on ensuring that there is reporting on how the bonds were used. But generally bond issuers are expected to self-report, and there is no requirement for external auditing.

The possibility that bank managers and governments abuse blue bonds for personal gain should be considered a risk in the emerging blue bond market. The fact that Credit Suisse and other European banks have been caught up in corruption related to bonds is further proof. Yet this is not mentioned in any of the promotional material for conservation finance. This contrasts to funds provided by donors and multilateral banks, for they have made attempts to introduce anti-corruption guidelines and safeguards. Private financial markets are much more relaxed on this.

The same is true on human rights. Donors and multilateral banks generally have grievance mechanisms and social and environmental safeguard mechanisms. They may not work very well in all cases, but there is no such framework in place for bonds, ethical or not.

Aligning marine conservation to ‘profit maximisation’

It is an explicit objective of conservation finance is to make sure that investments in conservation are profitable. For blue bonds, choices on how money will be used are therefore likely to be influenced by profit maximisation. This is worrying for groups who depend on the ocean but don’t generate a lot of money, such as subsistence and small-scale fishers. Generally the promotional material for conservation finance tells us that the benefits of these investments will be shared well, and that they will have a pro-poor impact. That seems unlikely.

A fundamental problem with relying on private capital markets to fund conservation is that the only measure of success is money. Non-monetary values do not translate well into financial instruments. The policy of encouraging governments in developing countries to raise funds through private capital markets has been strongly criticised for encouraging the privatisation of public goods and promoting the interests of multinational firms, and at the expense of local economies and businesses.

The spectre of blue washing

One of the main criticism of ‘green bonds’ is that they are not always very green. We don’t know yet what the concept of blue in blue bonds is, but we should assume it includes environmental sustainability.

Governments or companies can call their bond whatever they like. However, voluntary standards and labelling schemes have been integral to the growth of the green bond market. The standards are vague, and encourage bond issuers to pay for a third party assessment that demonstrates the ‘greenness’ of the proposal. The actual definition of ‘green’ is left open to interpretation.

Four international companies have cornered the market in providing these assessments. This is a weak system - companies providing assessments and labels have a vested interest in providing favourable assessments - as this will lead to more business and a better market standing. One of the key dilemmas facing these assessments is flagging the ‘rebound effect’. A simple example is a scheme to reduce the energy consumption of transport, which leads to savings. However, cheaper transport means people travel more, meaning the net impact of the investment was unsuccessful in reducing energy consumption and the release of carbon. These rebound effects of green financed projects are thought to be common, but it can take time to measure and detect. Third party assessments of green bonds often raise these issues, but it is not considered sufficient to give a bond a negative assessment. We therefore have green bonds passed as green by third party assessors for oil companies.

A further weakness of the green bond market is that the focus is on the use of proceeds. A key risk is that governments issue green bonds, but continue to invest and promote other polluting industries. Assessments of green bonds do not consider ‘policy coherence’, meaning a country such as Nigeria can raise a green bond while continuing to be heavily dependent on the export of fossil fuels.

The same problem manifests with investors and banks. Institutions like Credit Suisse or JP Morgan are enthusiastically promoting green bonds, but have much larger investments in dirty bonds. The same has been true for the World Bank Group, who has promoted the green bond market while generating more funds for the establishment of new coal plants.

Unlike other types of financing, green bonds also lack discipline. That is, money is provided upfront for green investments, but there is no way to return money if the impact of the investment was disappointing, even if there was interest in undertaking end of project assessments, which does not appear as a feature of green bonds at all.

A dilemma: dealing with the risks of the blue bond market

Organisations worried about these risks presented by conservation finance and the growth of blue bonds are confronted with a dilemma. A pragmatic approach could be to focus on mitigating the risks, including campaigning for stronger voluntary guidelines, commitments from banks to be transparent, and for social and environmental safeguards to be put in place by governments and financial institutes. Civil society organisations may also decide to invest time and resources in monitoring blue bonds and undertaking their own independent assessments.

But mitigating risks will be time consuming and may be unsuccessful. Indeed, the logic behind conservation capital is dubious. The underlying argument put forward that private financial markets will save the planet is unconvincing.

The ‘financing gap’ is ideological. The inability of governments to ensure marine ecosystems are used in a sustainable way is not simply down to a lack of resources and money; the root causes in most places is political in nature. We should not imagine that somehow governments will become responsible stewards of marine ecosystems simply by ensuring they have access to more funds through debt instruments. Indeed, given what we know about international debt markets in Africa, relying on these further will most likely lead to a growing funding gap for African governments.

Estimates of the financing gap for conservation are also a fabrication. There are many different ways in which changes could be achieved to support sustainable fishing and marine conservation, such as prioritising sustainable small-scale fisheries over other commercial industrial fishing companies. If funding is an issue, then other more sustainable sources of funds should be encouraged, such, raising taxes on polluting industries, or reducing government spending on other areas, such as the military. But there is no reason to believe that the only source of financing left for the ocean comes from private capital markets. There is also good reason to believe that following this path will provide disproportionate benefits for wealthier sections of society.

Ultimately conservation finance requires blind faith in the fairy tale that the only way we can achieve sustainable marine ecosystems is by making vast amounts of profits in the process, for ever. The move towards sustainable use of marine ecosystems will also require difficult choices to reduce growth and limit consumption. Sadly, there is a distinct possibility that the push for increased private financing is being made by a coalition of organisations that all have vested interests; investors seeking to display their social and environmental credentials, NGOs looking to increase their own funding, banks that charge lucrative fees, and governments looking for additional short-term cash.