‘Build back bluer’: Small island developing states pursue new finance mechanisms

The COVID-19 pandemic has devastated the economies of many small island developing states, particularly given their heavy reliance on tourism, a sector that has been on pause for almost a year.

These states, known as SIDS, have always been vulnerable to shocks, ranging from the global financial crisis to extreme weather events, and the pandemic has brought into sharp focus the need to transition to more sustainable economies.

But many SIDS are classified as middle-income countries, barring them from access to official development assistance and other forms of concessional financing. As they work to recover from the pandemic, they are tapping into new, innovative financing mechanisms to draw in impact investment and private sector financing. Leaders from SIDS are collaborating and sharing learnings in order to diversify their economies and build resilience for future shocks.

One example of a blended finance instrument that could benefit SIDS is the Global Fund for Coral Reefs, which launched in September 2020. It aims to raise $500 million in public and philanthropic funding to catalyze private investments to protect and restore coral reef ecosystems.

Coral reefs are essential to life below and above water, with 25% of all marine life and an estimated 1 billion people — many of them from SIDS — dependent on them for their survival. But they are one of the most threatened ecosystems on earth.

Last week, the Global Fund for Coral Reefs announced a fundraising campaign. So far, the German government, Paul G. Allen Family Foundation, Prince Albert II of Monaco Foundation, several U.N. agencies, and financial institutions BNP Paribas and Mirova have made commitments totaling more than $10 million. The campaign will culminate at the U.N. Climate Change Conference, or COP 26, in November.

“Coral reefs are at the nexus of the climate crisis and the biodiversity crisis. The solutions we’re going to be funding will be critical in the context of COVID recovery: Building back better and building back bluer. This global fund mechanism is going to be a critical way to do that,” said Chuck Cooper, managing director of government affairs at Vulcan, a company created by the late Microsoft co-founder Paul Allen.

The COVID-19 crisis presents an opportunity for SIDS to look beyond their vulnerabilities and identify opportunities to transition to “blue economies,” a concept that ensures better stewardship of ocean resources by linking sustainable use and economic growth, said Jorge Moreira da Silva, director of the development cooperation directorate at the Organisation for Economic Cooperation and Development.

“Clearly we have to rethink the way we approach the sustainable ocean economy, both from the perspective of risks the SIDS are incurring, but also untapping the potential that has been overlooked,” he said last week in “Catalyzing a new future: From small island states to great ocean states,” an event Devex co-hosted with the World Economic Forum. 

As SIDS seek financing, they need to think beyond official development assistance, Moreira da Silva added. By joining forces with donors, international organizations, and others to create investment opportunities, SIDS can broaden their focus from the $163 billion available in ODA to the $379 trillion available in the financial markets, he added.

Many SIDS are unable to access international capital markets due to their size, lack of creditworthiness, or high debt levels. But they can turn to existing instruments, including insurance bonds, investment funds, and carbon credits, said Marine de Bazelaire, group advisor on natural capital at HSBC, at the event. For many of these mechanisms, she noted, there is not enough supply to meet the growing demand from investors.

SIDS might also consider debt-for-nature swaps. For example, Seychelles has swapped some of its debt in exchange for designating nearly a third of its ocean territory as marine protected areas in a pioneering deal that was brokered a decade ago by The Nature Conservancy. It illustrates one way that countries can be compensated for preserving natural resources that are critical to their own survival in the face of climate change.

International action to support SIDS is urgent, said Danny Faure, the former president of Seychelles, at WEF’s Davos Agenda last week.

“We need to recognize that we have what we call here the next frontier of our development, and this is the blue economy,” he said. “And we must, all of us, rapidly put in place the right framework and mobilize international support so that we can fast track the development of the blue economy.”

SIDS’ challenges in accessing finance are pushing some SIDS to explore regional cooperation as a way to finance climate change adaptation and resilience.

For example, at the 2018 Pacific Islands Forum Economic Ministers Meeting, leaders from a number of SIDS developed a proposal to channel funds toward efforts that might help the region build resilience against the effects of climate change.

“In terms of the global climate financing resources, only 5% is dedicated towards adaptation. 95% goes towards mitigation,” Zarak Khan, director of programs and initiatives at the Pacific Islands Forum Secretariat, an intergovernmental organization headquartered in Fiji, said last week. “And I think it’s high time more resources are put towards adaptation and SIDS are supported by the global community in terms of financing these needs.”

The Pacific Resilience Facility is working to raise $1.5 billion, and will use the interest the fund generates to support community-level efforts, he said.

“Crucially, no debt will be created,” Khan said in an email to Devex. “The PRF will help Pacific countries stand on their own feet.”

Mangroves, coral reefs, fisheries, and other marine assets have been undervalued, said Valeria Ramundo Orlando, partner and co-founder at Green Square Ventures, a financial intermediary that supports institutional investors and corporations seeking to make a positive environmental, social, governance, and climate impact.

“They’re taken for granted by SIDS themselves,” she said at the Devex-WEF event. “And investors have not had an opportunity to see this as an investment opportunity.”

And while SIDS by their nature may be small states, the oceans around them provide ample opportunity to tap into the blue economy. The eastern Caribbean island nation of Saint Lucia, for its part, has a population of 1.4 million and a marine reserve the size of Germany, said Saint Lucia Prime Minister Allen Chastanet at last week’s Davos Agenda.

“When we get into the discussion of the blue economy, the amount of land space relative to the ocean in this part of the world is higher than anywhere else,” he said. “We play an important role in preserving and maintaining a blue economy.”

The blue economy could and should bring in much higher returns to Saint Lucia and other SIDS, he said.

Saint Lucia is partnering with WEF on a country financing roadmap aimed at mobilizing private capital in support of the Sustainable Development Goals. The country is piloting a model that uses private financing to pay for reskilling workers, which will be repaid by a percentage of future tax revenues resulting from an increased workforce.

It is also working with OECD and WEF to build a Blue Recovery Hub, which can be used to share lessons with other SIDS seeking to leverage innovative finance to support their blue economy transitions.

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