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Asset class / Equity

The dangers lurking within the blue economy

While the appetite for sustainable ocean economy opportunities is increasing, investors must pay more attention to the risks hidden therein.

Blue economy
A deep sea diver in search of opportunity. (Photo by Adrien Ledeul)

With the European Commission (EC) on 17 May proposing a fresh approach to how industries and sectors live off the oceans, seas and coasts, it’s clear the sustainable blue economy has moved higher up the public agenda.

The ocean is a crucial part of the global economy and ecosystem, yet due to pollution, overfishing and climate change its biodiversity is under threat, posing a risk to the livelihoods of billions of people reliant on the ocean for their food and work. Through a new European Maritime, Fisheries and Aquaculture Fund, the EC and the European Investment Bank Group have committed to supporting the transition towards more sustainable value chains on the oceans, seas and coasts.

Investors have a pivotal role to play in conserving the ocean, yet as Capital Monitor reported earlier this month, commitment to the UN’s SDG 14 – Life Below Water – is low, as is overall investment in the ‘sustainable’ ocean economy. The latter refers to financing for the restoration, protection and sustainable management of the ocean, and not including environmentally harmful sectors like oil and gas. Support predominantly comes from philanthropy and government institutions.

Sustainable ocean economy investment opportunities can broadly be categorised as either emerging sectors – such as blue carbon (the carbon captured by oceans and coastal ecosystems) and natural infrastructure, which can benefit from new capital – and mature sectors like fishing and shipping. The latter two industries instead require the redirection of capital towards sustainable alternatives, such as the transition to sustainable fisheries.

Getting the ocean on investors’ plates

Positive signs that a sustainable ocean economy is entering the mainstream include the emergence of blue bonds, such as the one issued by the Seychelles, or the $400m sustainability-linked loan issued by seafood conglomerate Thai Union in February this year.

Even investors without much exposure to the ocean economy are starting to take note of the opportunities it offers. Credit Suisse last year set up the first-ever ocean engagement fund with Rockefeller AM and BNP Paribas Asset Management. And the latter, also last year, launched the world’s first blue economy exchange-traded fund (ETF). BNP Paribas also has a strong group policy on ocean conservation, as well as being a member of the UN Sustainable Blue Economy Finance Initiative, along with a handful of private investors.

Yet despite this growing awareness, relatively little attention is being paid to the risks posed by ocean degradation within investor portfolios. Without greater engagement a sustainable ocean transition will struggle to take place. As of last year, only one in four investors reported having assessed their portfolios for ocean-related risks, according to Credit Suisse.

Admittedly, such assessment isn’t easy. For example, within the commercial fishing industry – a sector that relies on overexploited wild-caught (as opposed to farm-raised) fish stocks – a lack of transparency or strong regulation makes it hard for investors to know whether the companies they are financing are sourcing fish sustainably or not.

This has recently got some investors in hot water, such as when an investigation last year found that Western banks, including BNP Paribas, had provided billions of dollars to large fishing companies responsible for overfishing at-risk species of tuna.

Tracking down your food

Speaking to Capital Monitor, Robert-Alexandre Poujade, an ESG analyst at BNP Paribas Asset Management, described some of the firm’s ocean sustainability work, such as engaging with food retailers like British retail chain Marks & Spencer on sustainable fishing practices. But he also acknowledged that investing in the sustainable ocean economy comes with “a lot of challenges”.

“It’s very difficult when you invest in, for example, a food retailer, to know where the food, and especially the fish, has been sourced,” says Poujade.

John Willis, director of research at Planet Tracker, agrees. Planet Tracker is a non-profit financial think tank that advises investors on how to engage with the sustainable ocean economy. “Very few firms even tell you the species they are catching,” he says.

Planet Tracker advocates that firms provide this sort of information, and that investors push for greater transparency and traceability in seafood companies, which it believes will benefit investors as well as the environment.

For example, in its report ‘Traceable Returns’, Planet Tracker claims that if seafood processors implement seafood traceability they could double their profits while reducing investors’ risks. This is particularly relevant to investors with significant stakes in the largest Japanese wild-catch fishing companies.

Off the menu

Planet Tracker has found that investors aren’t showing concern for natural capital loss or its effect on their financials. In trying to establish why this might be, it analysed the financials of 70 Japanese seafood companies and concluded that many could be bypassing natural capital constraints through strategies including foreign expansion, acquisitions, vertical integration and cost-cutting.

“There are those that expect sustainability and financials to be closely correlated,” says Willis. “Sometimes it’s possible to swim against the tide. What we showed in our research was that despite a deterioration in natural capital (seafood in this instance) the financials continued to rise because management adopted strategies to reduce this risk. However, you can’t do this forever.

“We’ve spoken to a lot of investors and what we’re surprised about is that more of the investment and financial analysts who cover these companies haven’t done this work. That is what worries us the most,” he adds. “We have spoken to banks and have said that for their own business protection they need to start thinking about natural capital biomass.”

Clearly investors in the sustainable ocean economy have their work cut out, as they grapple with a market that lacks transparency and where retailers are “trapped” by having to rely on widely contested sustainability certification methods.

But Willis sees some hope in the form of initiatives like SeaBOS, a collaboration of actors in the seafood industry that are working to improve transparency and have, he says, made some “pretty meaningful commitments in a short time period”.

“[If] all those major players really did move,” he adds, “that would be significant.”

While this is positive, it’s clearly imperative that investors push hard for increased transparency in less sustainable ocean industries to ensure that investments in new sustainable products aren’t in vain.

Polly Bindman

Data Journalist

Polly joins the team as our data journalism lead tasked with making sense of the world via data and infographics.