T. Rowe Price bets on fast growth in $7B blue bonds market

T. Rowe Price Group Inc. is targeting a corner of the sustainable debt market that it sees growing fast over the next decade: blue bonds.

Blue bonds are debt instruments issued by companies or financial institutions to fund projects that help protect or revive the world’s oceans and waterways in the face of climate change, overfishing and pollution. The market has risen to about $7.2 billion since the first blue bond was issued six years ago by the World Bank. It’s now poised for further gains, said Willem Visser, emerging markets and impact fixed-income portfolio manager at T. Rowe Price.

“We’re at the inception point,” Visser said in an interview. The goal now is to strip water-focused projects from the wider $4 trillion market for green bonds and “develop a dedicated asset class,” he said. 

A total of 53 blue bonds have been issued since 2018, according to data compiled by Bloomberg. The bonds vary in size from a $12.8 million offering from Indonesia to a $750 million instrument issued by Seaspan Corp. to help the company decarbonize its fleet of ships. Almost half of the blue bonds issued to date have originated from Chinese entities.

T. Rowe Price teamed up with the International Finance Corp. in November for a fund dedicated to emerging-market blue bonds. T. Rowe Price said at the time that its Emerging Markets Blue Economy Bond Strategy expects to raise more than $500 million within a year of launch. The fund is targeting annual returns of as much as 500 basis points above the three-month US Treasury bill.

Visser said T. Rowe Price has about a dozen blue bonds in its pipeline, and expects to close up to four of them worth roughly $2 billion in total before the end of next year.

The prospective debt sales include instruments issued by water utilities in Brazil, chemical companies in Asia and financial institutions in Latin America. T. Rowe Price also is exploring opportunities around irrigation projects in Botswana and Zambia, Visser said.

Issuers can tap the blue bond market to access new sources of impact-orientated capital that they otherwise might struggle to reach, and first movers will likely benefit from more favorable funding costs, Visser said.

There’s one corner of the blue bond market that T. Rowe Price is avoiding: debt-for-nature swaps.

One of Wall Street’s hottest ESG trades last year, these deals bring in institutional investors to help countries refinance their debt, and then put any savings toward conservation programs. The product was pioneered by Credit Suisse with a $364 million deal for Belize in November 2021. The Swiss bank has since done swaps in Barbados and Ecuador — both prior to its takeover by UBS Group AG — while Bank of America Corp. completed a $500 million deal for Gabon last year.

The bonds issued to finance debt-for-nature swaps have in the past been labeled blue because of their ties to marine conservation. But Visser says they don’t merit that label because the bulk of the proceeds are used to finance the debt conversion, with only a sliver of the funds designated for nature projects.

It’s a concern shared by Barclays Plc analysts who raised the alarm about mislabeling in the debt-for-nature swaps market early last year. The International Capital Market Association, the most widely followed global standard setter in the debt markets, has said the blue-bond label should only be used if 100% of the proceeds are allocated for marine-conservation projects.  

Mislabeling isn’t limited to blue bonds. In the more developed market for green and sustainability bonds, just 23% of current stock — representing roughly $700 billion of assets — could claim alignment with the European Union’s forthcoming Green Bond Standard, according to data provider MainStreet Partners. 

Compliance with the European standard, which comes into force in December, should increase as issuers and investors “progressively realize the added benefits of the label, such as smoother compliance with regulation and lower reputational risks,” said Pietro Sette, a research director at MainStreet.

When it comes to nature investing, T. Rowe Price prefers structures with “very tangible key performance indicators,” Visser said. “That gives us a much better understanding of how our money is being deployed.”