The US, via the US Agency for International Development, and another as-yet unnamed government are backing a new guarantee company intended to derisk blue financing in climate-vulnerable developing countries such as small island states.
Nautilus Ocean, a joint venture between the Ocean Risk and Resilience Action Alliance and the group behind the new Green Guarantee Company, forms part of a raft of initiatives under ORRAA’s Sea Change Impact Financing Facility that also includes a blue bond incubator and an impact fund.
Karen Sack, executive director at ORRAA, terms SCIFF initiatives such as Nautilus (and also the Blue Economy and Finance Forum that Monaco will host next June before the third United Nations Ocean Conference) a “kick-off point for a capital market for the ocean”.
“What we have done over the past several years is work with our members to conceptualise the key framing and cornerstone elements for the capital market for the ocean and then think about how we can develop them,” she said, noting the opportunity for blue financing to harness its lag behind climate finance “to leapfrog over some of the mistakes that have been made and move forward”.
This effort saw ORRAA launch SCIFF at the One Ocean Summit in February 2022 as an umbrella for larger investment vehicles to finance the regenerative and sustainable blue economy. This aims to drive at least US$1bn of private capital by 2030 into coastal and ocean ecosystems, particularly in developing countries.
“We're not just looking at those countries that are the most debt-distressed, that need a debt-for-nature conversion, but [also] how we can further invest to build resilience and adaptive capacity for coastal communities, whether small villages or big cities, big coastal states or small island developing states,” said Sack, noting that this approach should help prevent later challenges.
Trickle of a trickle
Nautilus aims to complement GGC, which focuses on credit-enhancing green and blue transactions of US$50m and larger in emerging markets and should write its first guarantee by the end of the year. In contrast, Nautilus seeks to mobilise smaller amounts of climate finance needed by small island states and lower income countries.
“The point is that for a lot of the blue economy, small island developing states, those transaction sizes are just not viable for investors in global capital markets,” said Lasitha Perera, co-founder of Development Guarantee Group, the entity behind Nautilus and GGC.
Instead, Nautilus will guarantee blue EM deals of up to US$20m, with its first transaction likely to come next year. Deals will be in hard currency and local currency.
The company is raising an initial US$50m and will seek the same US$100m as GGC over time. It aims to announce a first close at June’s UNOC3.
Nautilus should help address the paucity of global climate finance going towards the blue economy in developing countries, which Perera estimates at 1% of the global south’s meagre share of the total. “It's a trickle of a trickle,” he said.
Like GGC, Nautilus will make use of bank originators. But the mega institutions that GGC partners with such as Barclays, Deutsche Bank and MUFG are less likely to bring deals to Nautilus, Perera said. This is due to their limited presence in regions such as the Caribbean, where local banks and medium-sized international players dominate.
The company, which is engaging with ratings agencies, is likely to apply a lower multiple to its transactions than BBB (Fitch) rated GGC will apply. This conservative stance reflects the absence of meaningful loss data for blue finance. “It’s very data-poor,” said Perera.
He expects Nautilus to be involved in the growing DFN sector, in which marine conservation financing has featured prominently in every recent sovereign deal – including those of Barbados, Belize, Ecuador, Gabon and the Seychelles. It has already discussed the possibility with The Nature Conservancy, the US NGO that has played a pivotal role in several DFN deals.
USAID, one of Nautilus’s two development funders and an investor in GGC, has been a key DFN player too.
Towards the mainstream
ORRAA’s blue bond incubator will support potential corporate and sovereign blue bond issuers from developing countries, including small island states.
“What I've seen is this constant iteration and growth each time there's a [blue bond] transaction done, better connection to impact and a little bit more efficiency as we're moving it towards the mainstream, and that's what the incubator will help to do,” said Melissa Walsh, blue finance and scaling director at ORRAA.
Citing ORRAA estimates of US$70bn market potential in the instrument by 2030, Sack said the incubator will seek to accelerate time to market. “We're not going to be able to do that [US$70bn] if the deals are taking years and years to deliver, and they are very small at the outset.”
It will also encourage peers to follow the leads of Fiji and Indonesia in issuing sovereign blue bonds.
Other SCIFF initiatives include the Outrigger Ocean Impact Fund, which invests in smaller island state companies in blue economy sectors like sustainable seafood, ecotourism, coastal management and biodiversity friendly renewable energy; Octopus Desk, a blue blended finance marketplace in development; a grant and impact loan facility for marine-protected areas; and Neptune Fund, a small philanthropic endowment for ocean conservation.
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