The Oceans as a Resource and the Challenge of Blue Finance

B l u e F i n a n c e S e r i e s - a F i n a n c e B l u e p r i n t fo r t h e Fu t u re o f o u r O c e a n s

T h e O c e a n s a s a Re s o u rc e a n d t h e C h a l l e n ge o f B l u e F i n a n c e

D u n c a n G a rd i n e r, G I B As s e t M a n a ge m e n t

With thanks to Venetia Bell and Gregga Baxter for their helpful contributions.

Introduction

Many economic sectors rely on our oceans, including fishing, shipping and tourism. But lack of understanding and mismanagement has led to severe negative impacts that put at risk the long-term sustainability of our oceans and the livelihoods that depend on them. These challenges create opportunities for investors to be part of the solution – we believe that the greatest profits will accrue to the companies that can help tackle the challenges and drive more sustainable approaches.

We hope that this series of articles will help investors to understand boththe issues and the opportunities within the broad theme of ‘blue finance’ –

solutions targeted at the world’s oceans, seas and marine resources.

We believe this has the potential to be a theme of major interest to investors in the coming years, although there remain many issues to overcome such as lack of data quality, immature financing structures and the need to coordinate and embed community-led action that enables a fair and equitable transition. We are committed to helping to raise awareness, and mobilising the finance sector to help be a force for good in this critical area.

Katherine Garrett-Cox, CEO, GIB Asset Management

Blue Finance series

In GIB Asset Management’s Blue Finance series, we will be discussing the threats facing our oceans, the current status of Blue Finance, and how investors are able to direct future capital towards ocean related-investment objectives.

Over the course of the coming months, we will cover the following topics:

1: The Oceans as a Resource and the Challenges of Blue Finance

2: The Blue Bond Market, Blended Finance and further Blue Finance Solutions

3: Blue Finance Equity Investment Leaders

4: The Blue Carbon Market and potential for Blue Carbon Sequestration

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Blue Finance Series - The Oceans as a Resource and the Challenge of Blue Finance

The Oceans as a Resource and the Challenge of Blue FinanceIn this first paper, we will address the following topics:

1. An introduction to the Oceans as a Resource – not only their crucial role in physical cycles but also the size of the ocean economy and its value as a resource.

2. Ocean Threats – humans have not been good stewards of the oceans. Pollution, rising CO2 levels and biodiversity loss through over exploitation not only threaten the oceans themselves but human livelihoods too.

3. Discussion on the current challenges in directing finance towards viable ocean sustainability solutions.

Introduction to the Oceans as a Resource

The ocean resource is vital to our physical and economic future

Our oceans are critical for human existence. It is estimated that microscopic phytoplankton provide between 50 and 80% of the oxygen that we breathe1. The oceans hold 97% of the planet’s water and they provide the critical heat transfer mechanism on which our climate relies. Oceans are highly efficient carbon sinks and absorb up to 50 times more carbon dioxide (CO2) than the atmosphere2.

While oceans are vital to human life, the global economy is heavily dependent on them as a source of transport, food and recreational tourism. The Global Ocean Commission estimates that the Ocean Economy had a “Gross Marine Product” value of $2.5 trillion in 2015 - this would make it the world’s 7th largest economy3. It is estimated that 70% of global trade4 is reliant on oceans and this is particularly the case for bulk products such as commodities. Sea fisheries accounted for almost 100mn tons of fish worth $150bn on a first sale basis in 20185. Coastal and maritime tourism is the largest maritime earning sector in the European Union and employs around 3.2m people.6 Maritime tourism is particularly important for Small Island Developing States (SIDS) and accounts for up to 25% National GDP in some countries7.

It is clear that healthy oceans are critical for our physical survival, but they also provide income and food for millions of people. It is vitally important that we find ways of managing this resource in a sustainable manner. Essential to these efforts will be how we address the financing required to preserve our oceans whilst addressing the myriad issues they face – pollution, seawater acidification and the over-exploitation of resources.

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Ocean Threats – a multitude of direct and indirect challenges

Our oceans face a multitude of challenges that threaten their future as a sustainable resource

The International Union for the Conservation of Nature (IUCN) estimates that 8 million tons of plastic end up in our oceans every year and that plastics make up 80% of all ocean debris8. This creates a number of issues around sea life ingestion, human health impact via presence in our drinking water and besmirching of tourist destinations. We are not doing enough to integrate plastics into the circular economy – reuse and recycling levels are still too low, with the consequence that an unacceptably high proportion of “landfill” plastics end up in our oceans (Exhibit 1).

Exhibit 1 - US Plastic Waste Fate

Source: United States Environmental Protection Agency

More broadly, approximately 80% of maritime pollution originates on land. This includes agricultural run-off, erosion, plastic and untreated sewage9. For example, agricultural runoff and sediment has a particularly severe negative impact on the Australian Great Barrier reef. While these threats have generally originated away from oceans, their indirect impact on ocean systems is severe and will require a coordinated effort to resolve.

Ocean Acidification

Ocean acidification through the lowering of water pH is a human-induced phenomenon that has potential impacts on marine life and fisheries. The Ocean absorbs 30% of the CO2 that is released into the atmosphere10 . As levels of atmospheric CO2 have increased, oceans have absorbed greater levels of CO2 - this in turn lowers water pH. Long term monitoring in Hawaii has demonstrated a gradual reduction in seawater pH that corresponds to rising levels of surface water CO2 (Exhibit 2). Lower pH is particularly bad news for communities that rely on shellfish or coral reefs because the calcium carbonate based structures of these organisms are weakened by higher acidity11. More directly, shipping is responsible for 940mn tons or 2.5% of global carbon emissions on an annual basis12. While this is a clear direct impact, terrestrial sources of CO2 will continue to play a major role in ocean acidification.

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Exhibit 2 - Atmospheric CO2 and Ocean pH 1988 - 2018

Source: School of Ocean and Earth Science and Technology at the University of Hawai’i at Manoa

Finally, we have over-relied on oceans for the provision of food resources. The UN Food and Agriculture Organisation (FAO) estimates that 90% of fishing resources are either fully fished or at biologically unsustainable levels13. As a specific example, the West Coast Pacific Sardine fishery of the United States remains closed after a collapse in the population due to overfishing (Exhibit 3). Despite its closure the fishery remains below sustainable harvest levels. A similar pattern exists for a number of other fish species andhistory shows that some populations never recover – a situation that is disastrous for biodiversity but also for the human populations that rely on them.

For communities that are heavily reliant on stable fish stocks, these are worrying indicators of the parlous state of our fisheries, and demonstrates that current practice cannot continue. We must find ways of ensuring that these resources are fairly allocated, but also that they are exploited in a sustainable manner.

Exhibit 3 - Pacific Sardine Spawning Biomass since 2006

Source Peter T. Kuriyama, Juan P. Zwolinski, Kevin T. Hill, and Paul R. Crone. 2020. Assessment of the Pacific sardine resource in 2020 for U.S. management in 2020-2021, U.S. Department of Commerce, NOAA Technical Memorandum NMFS-SWFSC-628.

How do we begin to address these challenges? They are numerous and sizeable, but they must be addressed as their ongoing persistence will have major impacts on human life, both now and in the future. Mobilising capital towards these challenges will be a crucial early step.

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“Co-operation, transparency and ownership will be vital in financing the

future Blue Economy”

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Blue Financing – early days, but a growing opportunity

The question of ownership creates challenges but corporations have the opportunity to embrace more sustainable and future proof financing

The UN Sustainable Development Goals (SDGs) have found prominence as corporations and financial institutions build frameworks for investment in a sustainable future. While certain of these goals feature highly amongst corporate governance literature, PWC highlight that SDG 14 (Life Below Water) is among the three least cited of all the SDGs14. This lack of interest or lack of ability to align with SDG 14 has a very clear correlation to the funding it receives and, as a consequence, the funding gap to 2030. At the same time, it is important to acknowledge that other SDGs, for example, progress towards SDG 13 Climate Action will have positive impacts on oceans.

Blue Ownership – who owns the Oceans?

An important part of the financing problem is ownership. The answer to the question of: “Who owns the oceans?”, is “everyone but no-one”. While this isn’t strictly the case due to inshore nautical limits, it highlights the problem of financing responsibility. Even for relatively small projects, the issue of ownership and consensus is clear – collective action is required for state and non-state players to make a meaningful impact.

In addressing the question of ownership, The Organisation for Economic Co-operation and Development (OECD) identifies 10 ocean-based industrial sectors and their share of value added (Exhibit 4)15. While these sectors do not own the oceans, their revenue and sustainability as businesses depends heavily upon it. If anything, these sectors can be seen as corporate stewards of the oceans. There is an opportunity for these sectors to mobilise sustainable finance to better protect and future proof these resources.

Exhibit 4 - Value added of ocean-based industries in 2010

Source: OECD

Using the above OECD framework, an important recent study identified the “Ocean 100”, the top Trans National Companies (TNCs) that derive the greatest revenue from ocean based activities16. In identifying these companies, the study allows us to assess the companies at the greatest potential risk from ocean-related threats (Exhibit 5).

Our analysis shows that the aggregate total debt outstanding of “The Ocean 100 “amounts to c$1.8tn. Further analysis using Bloomberg’s Environmental Score summary shows that, in aggregate, 42% of the “Ocean 100” show improving scores, with 13% declining and only 20% superior to their peers.

Industrial marine aquaculture

<1%

Industrial capture fisheries

1%

Industrial fish processing

5%

Maritime and coastal tourism

26%

Maritime equipment

11%

O�shore oil and gas…

O�shore wind<1%

Port activities13%

Shipbuilding and repair

4%

Water transport5%

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The largest companies on this list are the oil majors and, in general, show improving ESG scores vs their historic averages. This shouldn’t come as a surprise given the strides many of these companies have made in addressing their energy mix and reducing reliance on fossil fuels. At the other end of the spectrum, a number of shipbuilders in the “Ocean 100” show declining historical ESG scores and worse than peer performance – this is cause for concern and it is hoped that initiatives such as the Poseidon Principles (see Paper Two of this series for further discussion) and ongoing investor engagement will lead to improved scores.

While the direction of travel is positive, there is still much room for improvement and at a pace that aligns with global targets. This analysis highlights an opportunity for these companies to refinance debt along more sustainable lines – this is the opportunity for blue bonds and other forms of blue finance. In the same way that green bond financing has allowed terrestrially-focused corporations to finance sustainable practices, the blue bond market holds similar potential for ocean companies

Exhibit 5 - The Ocean 100

Source J. Virdin et al. Sci Adv 2021;7:eabc8041

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Bridging the Blue Finance Gap

An issue faced by potential financing mechanisms is drawing links between blue impacts of pollution, climate change and overexploitation as to how we finance solutions. Using the SDG lens, Target 14.1 has the objective: “By 2025, prevent and significantly reduce marine pollution of all kinds, in particular from land-based activities, including marine debris and nutrient pollution”. In this case, there is an obvious link between solving the plastics issue through various routes including: action from corporations (e.g. Coca Cola materially reducing plastics reliance17), local governments improving recycling and innovation as companies adopt technology that breaks plastics into their component parts (eg Carbios18).

When we explore the other targets of SDG 14, it is clear that sovereigns and supranational organisations have a much greater role to play. Target 14.4 covers effective regulation of harvesting and prevention of overfishing. In order to show any progress towards this goal, governments, international organisations and scientists will all need to be mobilised.

A key question is who takes responsibility for implementing these changes, and what impact will a reduction in fishing have on other SDGs, particularly those aimed at poverty and hunger reduction? The Tragedy of the Commons problem translates readily to a Tragedy of the Seas scenario, where nations are reluctant to agree sustainable quotas for fear of missing out. Co-operation, transparency and ownership will be vital in financing the future Blue Economy.

The Vital and Growing role of Data

The role of data and ocean science should not be underestimated and lays the foundation for analysis, valuation and ongoing progress monitoring. Our ability to monitor ocean health allows for more effective and sustainable resource allocation. In considering Blue Finance, placing a value on a resource means there is an incentive to protect, or at least utilise it in a sustainable manner.

Valuation of environmental resources has historically relied on market-based methods and a number of contingent valuation methodologies. These valuation methods rely on accurate data inputs and accurate calculation methodology. As data science progresses, we are not only able to identify ocean resources that are under threat but also apply multi-dimensional valuations that will provide greater incentive for their protection. Later in the series we discuss how this approach has been used to value the potential land protection that Caribbean mangrove forests can offer.

Conclusion

Our oceans face many challenges that threaten their future as a sustainable resource. Human impact in the form of pollution, increased levels of atmospheric CO2 and over exploitation have increased their vulnerability. Concerted, collective efforts are needed if we are to successfully address these challenges. A number of the world’s largest companies have a direct stake in the viability of the ocean resource and there is an opportunity for them to finance themselves in a way that is strongly aligned with ocean pres-ervation. Blue Finance has historically faced issues with drawing links between impacts and the ability to finance solutions. Global frameworks such as the SDGs are a key part of the solution but there is also a growing opportunity for us to harness reliable data for monitoring and evaluation of ocean resources for investment. Collective action and cooperation will be crucial in ensuring that sustainable goals are aligned and accountability will be vital in attracting financing solutions.

In the next instalment of this series, we further explore these issues and discuss a number of existing financing routes; including the current status of the blue bond market, innovative insurance solutions and cooperation via blended finance.

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1https://marine-conservation.org/why-protect-the-ocean/ 2https://oceanservice.noaa.gov/facts/why-care-about-ocean.html#:~:text=The%20air%20we%20breathe%3A%20The,our%20climate%20and%20weather%20patterns.3Hoegh-Guldberg, O. et al. 2015. Reviving the Ocean Economy: the case for action - 2015. WWF Internation-al, Gland, Switzerland., Geneva, 60 pp4https://unctad.org/webflyer/review-maritime-transport-20185FAO. 2020. The State of World Fisheries and Aquaculture 2020. Sustainability in action. Rome. https://doi.org/10.4060/ca9229en6https://ec.europa.eu/maritimeaffairs/sites/maritimeaffairs/files/docs/body/coastal-and-maritime-tourism_en.pdf7https://www.resortsupportfiji.com/2019/07/blue-tourism-transition-sustainable-coastal-maritime-tour-ism-world-marine-regions/8https://www.iucn.org/resources/issues-briefs/marine-plastics#:~:text=At%20least%208%20million%20tons,causes%20severe%20injuries%20and%20deaths.9https://www.un.org/sustainabledevelopment/oceans/10https://www.noaa.gov/education/resource-collections/ocean-coasts/ocean-acidification11https://www.nationalgeographic.com/environment/oceans/critical-issues-ocean-acidification/ 12https://ec.europa.eu/clima/policies/transport/shipping_en#:~:text=Maritime%20transport%20emits%20around%20940,not%20put%20in%20place%20swiftly.13https://www.oceanunite.org/issues/overfishing/#:~:text=According%20to%20the%20FAO%2C%2090,the%20highest%20proportion%20ever%20recorded.14https://www.pwc.com/gx/en/sustainability/SDG/sdg-2019.pdf15OECD (2016), The Ocean Economy in 2030, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264251724-en16J. Virdin, T. Vegh, J.-B. Jouffray, R. Blasiak, S. Mason, H. Österblom, D. Vermeer, H. Wachtmeister, N. Werner, The Ocean 100: Transnational corporations in the ocean economy. Sci. Adv. 7, eabc8041 (2021).https://www.breakfreefromplastic.org/wp-content/uploads/2020/07/branded-2019.pdf17 https://www.forbes.com/sites/scottsnowden/2020/04/11/new-enzyme-breaks-down-plastic-in-hours/?sh=656cb0815e4e

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N o n e o f t h e c o n te n t i n t h i s c o m m u n i c at i o n i s i n ve s t m e n t a d v i c e , a n d t h e i n fo r m at i o n c o n ta i n e d h e re i n i s fo r i n fo r m at i o n p u r p o s e s o n ly. T h e re c a n b e n o a s s u ra n c e t h at fo r wa rd lo o k i n g s tate m e n ts wi l l p rove to b e a c c u rate , a s a c t u a l re s u l ts a n d f u t u re eve n ts c o u l d d i f fe r m ate r i a l ly f ro m t h o s e a n t i c i p a te d i n s u c h s ta te m e n ts .

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Documents

The Oceans as a Resource and the Challenge of Blue Finance