A radical experiment off the coast of Mexico was undertaken at the end of 2020, where a coral reef was the first natural structure in history to be insured for damage1. Hurricane Delta quickly triggered the insurance policy’s first pay out, with around US$850,000 released for the reef’s repairs.
To mitigate the risks stemmed from the pressure that anthropogenic activity places on our ecosystems, including that of our oceans, more and more innovative financing mechanisms are required. These risks affect the livelihoods of three billion people that are directly dependent on the oceans, as well as heighten a variety of business risks for those working in the blue economy. However, it also brings a variety of opportunities for investors and businesses to address these risks, while realizing investment and business objectives.
When viewing earth from space, it’s clear why we are coined the “Blue Planet”2. What’s remarkable is that we know more about the surface of the moon than we do about our own oceans, with a mere five percent of our waters having been explored by human beings3. With water covering two-thirds of the earth’s surface, it seems absurd that we speak of ‘going green’ without making considerable reference to our planet’s vast marine ecosystems. Home to 80 percent of all life on the planet, oceans provide us with oxygen for every other breath we take, and yet the threat from pollution, loss of biodiversity and climate change is immense. We don’t have time to get this wrong. Let’s get it right.
The blue economy can be defined as “the sustainable use of ocean resources to promote economic growth, social inclusion and the preservation or improvement of livelihoods, while at the same time, ensuring environmental sustainability of the oceans and coastal areas4.” It includes traditional economic activities such as fishing, shipping and tourism, but has recently expanded to include offshore wind, deep sea mining and ecosystem protection, such as the aforementioned coral reef protection experiment in Mexico. With an annual economic value estimated at US$2.5 trillion, it is equivalent to the world’s seventh largest economy5.
Small Island Developing States (SIDS) rely extensively on their natural surrounding assets to develop their industries and support livelihoods and are on the frontline of climate change. Characterized by their small size, remoteness and reliance on their maritime environments, the SIDS are conscious of their dependencies on the oceans and their vulnerabilities, and as a result, are pioneering the blue economy paradigm.
The main issue with advancing the blue economy is the monumental attention and funding gap. The recent results of KPMG’s Survey of Sustainability Reporting identified the United Nations’ Sustainable Development Goal (SDG) 14: Life Below Water, as one of the least prioritized SDGs, with only 18 percent of companies prioritizing it6. An estimated US$174.52 billion per year7 is needed to fund SDG 14. This major financial deficit for such a critical resource for the world’s growing population will only result in catastrophic consequences for not only the SIDS, but for the entire planet. Minimal information on the blue economy, a lack of common principles and industry standards, as well as market distortions have created a fundamental financing obstacle which needs to be overcome, and quickly.
We have a once in a generational opportunity to drive real change through innovation. Innovation in terms of products and structures, innovation in terms of finance. The investment community has a strong role to play in driving sustainable investment, but needs measurable projects to be able to deliver impact. More private investment is badly needed. In pursuit of achieving climate and broader sustainable development goals, investors and businesses will have to understand and consider their impact and dependency on the whole ecosystem, including that of the blue economy.
The finance and investment industry can play a key role in funding the fight against climate change and the transition towards the blue economy. Innovative insurance products, such as catastrophe bonds and parametric insurance could be used more widely to finance and protect against the effects of climate change. Blue bonds are also emerging as a new innovative solution to provide sustainable financing for marine and coastal protection. Recent examples include bonds to protect coral reefs, mangroves and fisheries, as well as to combat ocean plastic waste. Financial institutions are slowly waking up to the idea that their activities can have a positive impact.
Innovative initiatives that combine finance with nature to protect our earth may be radical, but the cost of not investing now is only going to prove more costly in the future. For an economy worth an estimated annual US$2.5 trillion8, only US$13 billion9 has been invested over the last decade mostly through philanthropic efforts and official development assistance – a mere drop in the ocean. While there may be some concerns surrounding incentives such as the Mexican reef insurance project, perhaps the irony of monetizing something so invaluable is that this would be the most valuable step of all.
This article was originally published on kpmg.com.