Healthy and sustainable oceans are vital to mitigate the climate crisis. The ‘blue economy’ - which comprises all ocean-linked economic activities – offers increasingly attractive opportunities to impact investors. Small private equity and venture capital firms were pioneers in this space, but large private banks and asset managers are now joining the fray to anticipate growing client demand.
Seas and oceans cover more than 70 per cent of the Earth’s surface and are among the world’s largest carbon sinks. They absorb nearly 30 per cent of carbon dioxide (CO2), produce half of the oxygen we breathe and absorb more than 90 per cent of the excess heat produced by humans. They are also an enormous reservoir of biodiversity.
The two main barriers to sustainable blue economy investment is a lack of investment-grade projects and the need for innovative finance to de-risk and catalyse projects at scale, according to Credit Suisse/Responsible Investor
The value of all ocean-related businesses – including fisheries, aquacultures, marine biotechnology, tourism, maritime transportation and energy – is estimated at more than $24tn, making the blue economy the seventh largest GDP in the world. Moreover, it contributes at least $2.5tn a year in economic output according to the WWF, and is expected to expand at twice the rate of the mainstream economy by 2030, according to the OECD.
But human activities, from burning fossil fuels, overfishing and using the seas as a dumping ground for chemical and plastic waste, coupled with damaging effects of climate change, have been degrading the oceans for decades, badly affecting their capacity to provide these services. Bottom trawling, a widespread fishing practice, releases as much carbon dioxide every year as the entire aviation industry.
“The transition from the current short-term, destructive approach to ocean assets towards a more climate-secure and sustainable blue economy presents a tremendous economic and sustainable investment opportunity,” says Marisa Drew, chief sustainability officer for Credit Suisse and global head of the sustainability strategy, advisory and finance group.
Pivotal role
The financial services industry can play a pivotal role in driving the ocean sustainability agenda: much larger sources of funding are needed to make the transition and one key source is private capital.
But the few investment solutions targeting conservation and sustainable use of the oceans, seas and marine resources – in line with the UN’s sustainable development goal (SDG) 14 ‘life below water’ – tend to be small and illiquid, offering relatively short track records, making it difficult for to add them to private banks’ lists of recommended funds or accommodate large investors.
Typically, they are private equity or venture capital funds investing in start-ups or small and medium-sized companies providing innovative solutions to some of the oceans’ biggest challenges. They may invest in satellite solutions to fight illegal, unreported or irregular fishing, which accounts for nearly 20 per cent of the world catch, or in solutions to improve the sustainability of aquaculture, by using more efficient and sustainable feed solutions. Aquaculture accounts for about half of all global seafood demand for human consumption and is the fastest-growing segment of the food industry.
Attractive investments are also in solutions that contribute to the reduction of CO2 emissions and any other type of pollutant from maritime transportation, namely ‘green shipping’, and offshore renewable energy.
“Over recent years there has been increasing investors’ attention to the blue economy and we have seen the emergence of impact investors and impact private equity funds investing in companies supporting healthier oceans, aiming at fighting maritime pollution, overfishing and contributing to more sustainable aquaculture,” says Boris Teillant, project developer, blue economy, at science-based business incubator Atlanpole and sea innovation cluster Pôle Mer Bretagne Atlantique.
One common challenge is the difficulties for start-up companies to validate their innovations in the real environment, namely the sea, be it a new type of wind turbine or a maritime transportation solution.
“Many ocean-based solutions to mitigate climate change have enormous potential but often lack visibility and require large amounts of funding to scale. Crossing the ‘valley of death’ for blue technologies is often more expensive compared to land-based technologies, due to a more complex environment,” says Mr Teillant.
Yet, the offshore wind industry has been experiencing double digit growth for years, with the trend expected to continue, while market opportunity for green shipping is “absolutely tremendous”, especially in view of more stringent regulation.
“Investment opportunities in the blue economy abound, as there is a massive number of companies with serious, reliable, high potential solutions for global international markets,” says Mr Teillant. “But the pool of investors willing to listen and invest is still relatively small compared to the companies’ potential, the diversity of markets they address and the impact they can have globally,” he adds.
Growing awareness
Growing environmental consciousness and public pressure are also driving the growth in the sector. “There's now a global awareness around the threats to the ocean, people are changing their consumer habits, pushing regulators to act and affecting companies’ business models,” says Olivier Raybaud, managing director at Swen Capital Partners.
The French asset manager runs an impact venture capital fund, which aims to identify “early on” innovative start-ups that can generate a “systemic impact” to address the three key threats to the ocean, classified as unsustainable fishing, pollution and climate change.
Among others, the fund focuses on innovations that improve efficiency in the recycling value chain of plastic or solutions for new biodegradable materials, which may replace some applications of plastic.
Fast moving consumer goods companies are “desperate” to take single use plastic out of their value chains, with most firms having committed to ban single use plastic by the middle of this decade.
Solutions to cut plastic waste are to be found on land. “Once the plastic ends up in the ocean it’s already too late. So far, we've not found any business model that is profitable and scalable that will address this issue,” says Mr Raybaud.
At the current rate, volumes of plastic entering oceans annually could nearly triple in the next 20 years, with more plastic than fish in the sea by 2050, according to a study by the Ellen MacArthur Foundation.
The Blue Ocean strategy is gaining the interest of family offices, especially those led by younger generations, who are “very sensitive and willing to invest with impact”, states Mr Raybaud.
Policy-makers and regulatory pressure are essential to the growth of ocean-related assets, but not sufficient alone. “The blue economy has been a sector somewhat neglected by investors historically,” explains Adelaide Cracco, head of unit climate and environmental impact investments at the European Investment Fund (EIF).
The BlueInvest Fund, which EIF launched at the beginning of 2020 in partnership with the European Commission, “was able to unearth specialised funds backing the blue economy” and today provides financing to five selected venture capital and private equity funds.
Although such funds range from only €30m to €150m in target size, more recently the EIF invested in private equity firm Ocean 14 Capital’s inaugural impact fund, focused exclusively on the blue economy, with intention to scale up to more than €150m.
New legislation to limit the environmental degradation of oceans and coastlines, which will ultimately make corporates' accountable, is likely to drive greater M&A activity, with big corporate players expected to acquire start-ups and companies offering ocean-related solutions.
But there is also clear need for “risk capital”, states Ms Cracco. “It is crucial to attract strong private investor participation in the blue economy and other environmental sectors, because public intervention can only go so far.”
Beyond the silo mentality
Oceans are the first in line to be hit by climate change, but they also hold many solutions to tackle the climate emergency. This makes the blue economy interesting for investors, says Dennis Fritsch, project coordinator, sustainable blue economy finance at the United Nations Environment Programme Finance Initiative, which aims to mobilise private sector finance.
The Blue Economy Finance Principles, introduced last year and hosted by UNEP FI, provide a guiding framework for financial institutions to align their activities with the UN's SDG 14 across five sectors, including seafood, shipping, ports, coastal and marine tourism and marine renewable energy.
However, the biggest hindrance to growth is lack of awareness, says Mr Fritsch, or ‘ocean literacy’. It is important to understand the connection between the ocean, climate and biodiversity.
“Many of the sustainability topics are very much interlinked. Investors cannot look at ocean health, biodiversity and climate pollution independently. We have to move beyond the silo approach and realise everything's interconnected,” he says.
It is also crucial for investors, governments, civil society and NGOs to collaborate, while public-private partnerships and innovative finance are needed to de-risk and catalyse projects at scale to attract private capital.
Heavyweights
The arrival of private banking and asset management heavyweights in the blue economy underlines growing investor appetite for a wider range of investment products that contribute to healthy oceans and marine ecosystems. It also shows that major portfolio risks, looming in a ‘business as usual’ scenario, can no longer be ignored.
The blue economy ETF, launched by BNP Paribas Asset Management in September 2020, while not an impact fund, gives investors exposure to large, liquid companies such as offshore wind companies, ecotourism operators, pollution reduction and marine biotech companies. These firms have a strong interest in preserving sustainability of the services the ocean offers, says Robert-Alexandre Poujade, ESG analyst, biodiversity lead, sustainability centre at BNP Paribas AM.
Investors also gain exposure to partners these large companies work with, including innovative start-ups. The ETF, which has gathered €220m, also includes a stewardship feature which “augments the value proposition for clients”, albeit, by construction, an ETF cannot use the pressure of divestment to help investee companies convert into good corporate citizens.
The French asset manager also recently launched an actively managed impact equity fund, investing in firms that can help restore and protect biodiversity, including aquaculture firms and water infrastructure companies offering solutions to prevent pollution from entering water streams.
What drove Credit Suisse to act in the blue economy space was the realisation that, despite growing investor interest in ocean-related opportunities, the ocean had attracted very little private capital flows. A comprehensive investors’ survey carried out by the Swiss private bank two years ago showed that SDG 14 was the second least invested of all UN SDGs.
“That was a real eye opener for me, given the ocean is so absolutely critical to planetary and human health, and to help mitigate climate change,” says Ms Drew.
The truth was that most investors, including family offices and high net worth individuals, had never been presented with the “right investment opportunities for profits”, apart from venture capital money or direct investment opportunities.
As a first “experiment”, the bank launched a structured note with the World Bank, with cash invested in projects directed towards the marine economy, which gathered $15m (€13.4m). “Our private banking clients loved it and I started getting much more into the idea we could do something at scale,” explains Ms Drew.
The desire to meet private clients and family offices’ need for a liquid strategy led Credit Suisse to devise an impact fund based on shareholder engagement, also considering there are only few public companies directly ocean-related and that it is hard for investors to make much of a difference in a public equity strategy. The Ocean engagement fund, launched in September 2020 and managed by Rockefeller Asset Management – with non-profit NGO Ocean Foundation acting as fund adviser – invests in both ‘ocean leaders’ and ‘ocean improvers’. The latter include sustainable firms, such as waste infrastructure companies, which may be already targeting a different SDG or multiple SGDs, but willing to embrace change to become even better “ocean stewards”, creating value for the company and investors.
The thesis behind the fund is that “the work that companies could do to be better ocean stewards is not really understood or valued yet”, but that is set to change as investors become increasingly aware that best practices increase the potential to generate higher profits and healthier returns, explains Ms Drew.
The fund has already attracted more than €500m in assets since its launch in September 2020. The surprising success shows that “sometimes the hurdle for private capital investors is just that the structures haven't met their needs or the linkage between dollars and outcomes isn't there”.
Credit Suisse has also worked with the UN to create a set of ‘blue bond’ principles to support a blue bond market, akin to the green bond market. It is also continuously educating clients around the ocean as an investable opportunity, against the common misconception that it is a public good and should be left in the hands of governments and non-profit organisations.
“What is important,” says Ms Drew, “is changing the narrative to make people think about the ocean as an economic engine which is investable, and presenting opportunities that generate market rates of return. This makes investment solutions compelling and attracts capital flows and that’s when you can scale it.”
