Kick-starting the Blue Economy Revolution

This is part one in a two-part series covering the Blue Economy.   

Written by Edward Lichtig, Jenni Henderson and Josh Phillips 

Special contributions by Gregor Paterson-Jones, Paul Seaton and William Glamore. 

It takes a lot of blue to stay green. Our oceans deliver as much as USD 2.5 trillion (AUD 3.9 trillion) in economic activity and can contribute substantially to a low carbon future. But where should investments be channelled and why are SMEs so integral to the Blue Economy?  

To understand these questions better, let’s first define the Blue Economy.  

Blue Economy: sustainable use of ocean resources for economic growth, improved livelihoods, and jobs while preserving the health of the ocean ecosystem. (World Bank)  

Sectors of the Blue Economy include activities such as bioprospecting, blue carbon, ecotourism, fisheries, mariculture, and marine energy production.  

Bioprospecting: Sustainable approach bringing economic and social benefits to often poor communities. It explores plant and animal species to be used for genetic resources in pharmaceutical and biochemical industries. (UNDP)   

Following the SDGs 2030 Agenda, sustainable economies have been defined as those which are economically, socially, and sustainably managed. Therefore, to align with the UN goals, investors in the Blue Economy should seek these same outcomes.  

Blue Economy businesses use capital in two main ways:      

1) Existing businesses make strategic investments that facilitate more sustainable practices, and      

2) Investment in novel solutions to unsolved problems with unproven business cases.  

What should investors and institutions aim to achieve in developing the Blue Economy? Investors should aim to: 

1. Ensure ocean resource-based activities are socially, environmentally, and economically sustainable and fair.  

2. Develop healthy oceans for a thriving economy and ecosystem.  

SMEs play a big part in the Blue Economy      

70% of employment and 90% of total enterprises in the Blue Economy are SMEs. Thriving SMEs are therefore vital for healthier oceans.  

Yet, as in other sectors, SMEs face significant funding gaps. Funding shortfalls affect sustainability in our oceans.  

Increasing business prospects in the Blue Economy has led to stronger demand for capital by SMEs. Yet, SMEs in the Blue Economy face considerable challenges in accessing finance.  

For example, despite offering enormous potential, ecotourism businesses interested in transitioning to low-emissions electric ferries face significant upfront capital requirements.  

Based on surveys done in island economies such as Barbados, Philippines, Fiji, the Maldives and Indonesia, Blue Economy SMEs can struggle with the access to commercial loans or investments due to:  

• A lack of collateral  

• Poor financial records  

• The inability to assure investors of future project cashflows  

• Debt serviceability 

• Limited primary resources and technical assistance to get off the ground  

• Difficulty demonstrating technical skills and credentials 

In short, SMEs often struggle to receive the investment they need, as they cannot meet the due diligence requirements of investors and banks.  

Challenges to investing in the Blue Economy     

Not all the obstacles of Blue Economy investment are experienced by SMEs. Investors also have their constraints.  

Some of these challenges are:  

• Sourcing a pipeline of investment-ready projects  

• Finding sufficiently progressed investment projects 

• A lack of investment-grade opportunities, such as projects with a large enough ticket size for investment  

• A penury of SMEs suitably structured for the investor’s specific mandate  

• Given the SME's size or level of experience  

• It might not fit the investor’s risk appetite  

• The risk doesn’t match the realisable return 

Unlike regular markets, when working with natural capital investment timeframes must work within nature’s timeframes: we cannot easily scale or expedite natures processes. For example, if it takes 20 years to grow a mangrove forest, the funds needed should be willing to take that risk.  

Natural Capital: The total available biophysical stock of natural resources (World Bank Group) 

In certain cases, investing in the Blue Economy does not provide a commercial return and returns must be subsidised or grants must be made to protect the oceans. In other cases, investors who can take on greater risk, longer tenors or earlier stage businesses are needed.  

Overcoming the challenge of investing in Blue Economy SMEs     

Despite the challenges, there are practical pathways to a sustainable Blue Economy and a range of instruments available for institutions looking to invest in this sector.  

Public and concessional capital can be blended with commercial capital to structure investments that match both the investor needs and the underlying characteristics of the Blue Economy target investments. 

The following table maps the various financial tools and models that are helping to apply financial solutions to the Blue Economy. 

Solution	How this solves the demand side problem (SMEs)	How this solves the supply side problem (investor)
Blended finance  Concessional capital from public/philanthropic sources ‘blended’ with commercial terms to increase sustainable private sector investment.	Technical assistance may be provided by concessional investors to help businesses improve investment readiness.	Concessional capital can reduce risk for commercial investors by taking first-loss, lower returns and/or guaranteeing investment principal.
Alternative funding sources – e.g. Fintech platforms such as Funding Societies  Low-cost borrowing to empower SME Blue Economy financial sources.	Fast turn-around from application to receipt of funds. Alternate data points for credit checks allow for more SME eligibility. Low-cost borrowing.	Larger ticket sizes can be available, if aggregating on a funding vehicle level. Investors can securitise in some cases. Overall, the risk is distributed through a portfolio of SME loans, rather than single loans.
Convertible notes  A form of venture capital allowing debt to be converted into future equity.	No need to have upfront costs of restructuring to facilitate investment.	Investors can make investments more quickly and with lower due diligence and administrative cost.
Fintech for underwriting  Innovating and automating loan-granting processes.	Alternate data points for credit checks allow for more SME eligibility.	Reduces the cost of due diligence on SMEs and assesses a SMEs risk when they don’t have strong financial or other records.
Guarantees   Non-cancellable promises backed by a third-party to guarantee investors principal and interest payments.		Public sector investors, development finance institutions, and others provide guarantees where small businesses don’t have the collateral to access loans on commercial terms.
Grants  Financial awards given by an entity to an individual, company or project to facilitate a goal or incentivise performance.	Supports expensive up-front business development activities, particularly R&D.	Grants can provide subsidies for elements of Ocean Economy businesses or projects that do not have a specific cash flow associated with it.
Patient capital from public investors  Long-run investments to match the period of nature and be delivered to those in public markets.	Longer tenor or low-interest rate loans help SMEs get off the ground and have grace periods on debt. This reduces the constant demand for financing SMEs.	Reduces risk to investors with shorter investment tenor.
Debt for Nature Swaps  Purchased discounted debt of a developing country, and its cancellation in return for investment in environment related project	Redirects unwanted debt to the country’s Blue Economy.
Blue Bonds  Money raised is channelled on the condition to be used for a green-related project. In some cases, money might go to a state-owned entity as a grant to enhance the economics of a loan. The money remaining is then recycled.		De-risks money curated for finance projects.
Blue Carbon Credits  A credit system whereby projects that restore blue carbon ecosystems, and reduce emissions are eligible for credits to be earned based on the tonnes of carbon stored.	Businesses make a profit of the credits sold to global buyers to offset their carbon emissions, providing a new stream of untapped income.

The take-home message  

SMEs are a key player in contributing to positive outcomes in the Blue Economy. But they struggle to access finance. There is a growing corpus of investment tools available to overcome these challenges.  

This is part one in a two-part series covering the Blue Economy. In part two, we’ll examine regulations and which countries are making these ideas a reality.