Opinion: SIDS can tap into blue finance to safeguard the blue economy

With world travel and tourism yet to recover from the ongoing COVID-19 pandemic, many small island developing states are feeling the pressure.

These states, commonly referred to as SIDS, are highly dependent on the tourism industry and have long been exposed to the risks of climate shocks and extreme weather events. The pandemic has highlighted the need for SIDS to speed up their transition to being more climate-resilient.

However, due to their small size, geography, and other factors, SIDS continually face difficulties that challenge their ability to build resilience against future shocks. For instance, some SIDS’ classification as middle-income countries has restricted their access to official development assistance and other types of concessionary financing. For many SIDS, accessing international capital markets is similarly challenging due to their size, debt levels, and creditworthiness.

SIDS may be small states but the ocean surrounding them has vast, untapped potential. As SIDS work to recover from the pandemic, they should unlock much-needed capital to safeguard their “blue,” or ocean-based, economy by tapping into innovative financing mechanisms.

Blue finance

Blue finance is an emerging area of climate finance. It’s a form of socially responsible investing that seeks to not only consider the financial return but also environmental good by funding ocean-friendly projects. It has increased interest from worldwide investors, financial institutions, and issuers.

Innovative funding solutions, such as blue finance, are key to enhancing ocean and coastal preservation and can help address pressing challenges facing SIDS.

Debt-for-nature swaps

One example of a blue finance instrument that could benefit SIDS is debt-for-nature swaps. These swaps are a way for SIDS to safeguard their blue economy by preserving their natural resources.

In the past decade, SIDS such as Seychelles has swapped some of its debt in exchange for designating nearly a third of its ocean territory as marine protected areas. The innovative debt conversion model permits the small island nation to forgo a proportion of its foreign debt in exchange for governmental commitment and investment in marine conservation projects.

In November, Belize finalized the biggest debt-for-marine conservation deal. The small Central American island agreed to buy back its only international bond — a $533 million “superbond” — at 55 cents on the dollar. A special finance vehicle was set up by The Nature Conservancy, which used funding from Credit Suisse that it then lent to Belize to buy back the superbond. The deal will allow Belize to increase the size of its protected marine area from 15.9% to 30% of the coastline.

Parametric insurance for coral reef restoration

For the sustainable development of the blue economy, the insurance sector is key. The role of risk transfer and risk pooling has become more important as the frequency and intensity of natural disasters increase. Insurance mechanisms are spurring the financing and restoration of coral reefs.

In 2018, in a bid to promote conservation in coastal areas in Mexico, a parametric insurance policy for coral reefs was launched.

The parametric insurance policy was designed to cover hurricane-related damage to coral reefs. One of the key ways it differs from conventional insurance mechanisms is that in the event of a hurricane, the insurance mechanism is designed to rapidly payout for repairs and restoration of coral.

Coral reefs are essential to Sustainable Development Goal 14 — life below water — and SDG 15 — life on land. But they are one of the most threatened ecosystems and face great extinction risk. Twenty-five percent of all marine life depends on them and at least 500 million people directly depend on coral reefs for their livelihoods — many of them from SIDS.

Last year, reinsurance broker Willis Tower Watson partnered with the Mesoamerican Reef Fund to develop and implement insurance solutions with the aim of protecting and restoring the 1,000 kilometers (621.4 miles) reef system along the Caribbean coast.

Insurance mechanisms such as these can help bridge the gap by providing a means to transfer the risks associated with investments in blue economy activities. SIDS can further diversify their funding sources by tapping into these blue finance mechanisms to help safeguard their blue economy and enhance conservation efforts.

Leveraging innovative financing mechanisms

Looking ahead, as SIDS face an uphill battle in recovering from COVID-19, a healthy ocean is a key piece of the puzzle.

Protective marine and coastal systems in SIDS are crucial to safeguarding the health and welfare of coastal communities and for social and economic progress.

Leveraging innovative financing mechanisms such as debt-for-nature swaps, parametric insurance, and other blue finance instruments could go a long way. The tangible examples mentioned above demonstrate the feasibility of blue finance to support SIDS to build climate resilience, unlock large-scale investments in natural assets, and safeguard their blue economy so that SIDS can build back bluer.