The Angle 
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Nick Trueman Welcome to “The Angle” from T. Rowe Price. Sharper insights on the forces shaping financial markets begin here. In this inaugural season of “The Angle”, we're diving into the world of the blue economy. I'm Nick Trueman and I'll be your host, as we learn more about this intriguing and rapidly evolving area of the economy and financial markets. In this first episode, we're discussing the features of the blue economy.

A few stats to set the scene and provide context for why this is such an important topic. The numbers are staggering. The United Nations Environment Program Finance Initiative estimates that ocean linked sectors contribute 2.5 trillion USD to the global economy and support over 30 million jobs worldwide. The oceans provide a vital source of protein to 3 billion people, while its ecosystems are significant mitigators of climate change. According to the UN, over 2 billion people lack access to clean drinking water and 2.4 billion people live in water stressed areas. Water is both a development issue and a sustainability issue.

Here to discuss the blue economy are my guests today, Poppy Allonby and Samy Muaddi. Both were involved at the COP 28 conference in Dubai. Samy is head of Emerging Markets fixed income at T. Rowe Price and an adjunct professor at Georgetown University. He has a wealth of experience as a global investor and engages in international forums on the role of finance to help develop a sustainable blue economy.

Poppy is head of ESG enablement at T Rowe Price. Over her career, Poppy has worked as a portfolio manager focusing on companies that enable the transition to a lower carbon economy and has been a board member at one of the world's largest endowments. Poppy has also worked as a commissioner at the Energy Transitions Commission, which works to help accelerate the adoption and use of low carbon energy systems.

Poppy/Samy welcome to the podcast. Thank you very much for giving me your time today.

Poppy Allonby Nick, It's great to be here. and I look forward to the conversation.

Samy Muaddi Thank you for having us.

Nick Trueman Samy, perhaps I can start with you. Many people are familiar with the idea of the green economy. What is the blue economy and why is it important?

Samy Muaddi So, Nick, let's start with an image. The image in my mind was from the Apollo spacecraft in 1972. That famous photo called the Blue Marble. I think it changed everyone's perspective as to the importance of water and ocean. But why are three financial professionals here sitting around the table talking about this theme? Right. I think when I reflect on it, it's our responsibility as a financial industry to amplify the work that has been done for decades since from the scientific community, academics, policymakers, civil society to amplify their work, because there's an issue of urgency around here. Since that photo was taken from the Apollo spacecraft the world population has more than doubled. It has increased by 120%. And so, despite the collective efforts of everyone involved in clean water and clean ocean initiatives, we still have this tragedy of the commons.

Clean water is a universal value. I go around the world meeting a client base from the United States to Europe, from the Middle East to the Far East. The importance of water is tied to our history, our culture, our communities. But yet sometimes it feels easier to talk about financing exploration into Mars than financing clean waterways here on our blue marble.

So when we think about the blue economy, it's everywhere. Two thirds of the global economy is moderately or highly dependent on ocean resources. Yet ocean resources, the UN Sustainable Development goals associated with clean water and clean ocean are among the least funded of all the UN SDGs. These themes, they run across all the industries that I've seen in my 18 years of investing in emerging markets – across utilities, transportation, shipping, renewable energy, water treatment, distribution, sanitation, water efficiency. That two and a half trillion dollars of value that you referenced. I see it every day in my investing field, and I'll just close my opening remark here on that point of urgency. More than 90% of all the additional energy accumulating on Earth because of human changes to the climate has ended up in the ocean, more than 90%. And obviously that's most evident in the poles, but now also in the barrier reefs and changing weather patterns and coastal communities. So, I think as a financial industry, there's a lot we can do to amplify the great work being done by other members of this ecosystem.

Nick Trueman Thanks Samy. Really helpful introductory comments. Let me see if Poppy wants to wants to add anything at the top of the podcast.

Poppy Allonby Well, I just, when I think about the blue economy from a financial perspective, I think of two things. I think you've outlined and Samy has outlined, that this is an area that is a large part of the economy but is also growing. It's got a strong growth outlook. And secondly, when we're talking about the blue economy, it's about growth, but it's also about the preservation of our oceans and clean water resources. And Samy’s done a great job of highlighting that, but we need to look at sustainable approaches that can also serve to develop economies and improve livelihoods all around the world.

Nick Trueman It's clear then that the blue economy is a vital sector for the environment, for economies, for jobs, for communities around the globe. Definitely an important one to foster and develop. We know that water resources are under threat, and you can't have a blue economy without reliable and clean water to underpin it. Poppy, can you elaborate on some of the threats confronting the blue economy?

Poppy Allonby Sure. There are a number and they're coming at us from all directions. So the areas that people chiefly focus on are around water scarcity. So lack of available clean water. Pollution related to that, and then degradation of our waters ecosystems and, you know, where land meets water. As we've talked about, water covers 70% of the Earth's surface. But increasing demand and unpredictable supply have led to significant accessibility challenges for a huge amount of people. I think the U.N. estimate that now 2 billion people have challenges with getting access to sort of safe and secure water. So that is essential to health, food security, poverty reduction and economic stability. And then there are also big risks to marine ecosystems. This is to our fisheries stocks. But also oceans generate oxygen. They absorb excess heat and carbon and support those vital ecosystems that so many of us rely on.

So, you know, I'm naturally an optimist I would say Nick. So even though you can look at all of these challenges and it can feel overwhelming, generally when I hear the word challenge, I also think about opportunities for solutions. And I think the positive story here is as Samy mentioned, there's innovation underway, whether that be in terms of power supply and offshore renewables, or through to the transformation of ports and shipping. So, while there are many challenges, that also paves the way for people to get involved and do something about it.

Nick Trueman So there are two factors at play here. The importance of the blue economy to global economic activity and livelihoods, and the rising threats to water resources that underpin it. It partially explains why bodies such as the United Nations have created programs that foster more sustainable development of these resources. Among them are a series of sustainable development goals or SDGs. Samy - Help us understand more about these activities and the Sustainable Development Goals.

Samy Muaddi Thanks, Nick. I'd start in 2010 when the United Nations General Assembly passed a resolution recognizing that access to clean water and sanitation is a human right. And expanding upon that this is tied into the 17 sustainable development goals passed in 2015 that defined specific targets to be met by 2030. The Sustainable Development Goals or SDGs. They provide a blueprint of the global goals to achieve a sustainable future and an equitable future.

The two that I think we're really focused on here in our discussion are the goals linked to water. SDG 6 for clean water and sanitation and SDG 14 for life below the water or clean ocean. These are among the least funded of the SDGs despite what I talked about earlier, is the universal value shared by everyone that I meet around the world on the importance of clean water to our history, our culture and our communities. Now the investment required to fix that. So taking that challenge and then Poppy's optimism on opportunity, the investment required to meet the UN SDGs is now estimated, it's going to require 5 to $7 trillion in annual investment through 2030. You know, a significant portion of that being tied to clean water.

And I would just close again, I really want to underscore this point that Poppy made. While we're focusing on water. Water is a development issue. It's an equity issue. The lack of clean water disproportionately impacts the poorest populations, it disproportionately impacts youth in the global south, and then it disproportionately impacts women, as well. So I would go back and maybe close that word responsibility. I think we in the financial industry have a responsibility to amplify the work that's being done to help address these issues.

Nick Trueman With 5 to 7 trillion US dollar dollars in annual investment required through to 2030 to meet the UN SDGs, there appears to be a clear role for the financial sector to play a part in mobilizing capital towards projects that can help address these challenges. Poppy, you were a COP 28. COP stands for Conference of Parties. It's an annual UN climate change conference. What were you hearing from the delegates?

Poppy Allonby Thanks, Nick. So one of the things that came out of COP was much more of a narrative around how important the oceans are. In fact, you often heard in the hallways and in the meeting rooms that you can't get to a Paris one and a half degree aligned scenario without considering the oceans. Some of that is because of the reasons Samy outlined in that the ocean is the largest carbon sink and absorbs about 90% of the warming generated from climate change and forms. Part of the nature-based solutions that are being discussed at COP and other related events.

I was encouraged by a number of announcements at COP. For example, the US and the UK reaffirm support of the Green Shipping Challenge to help propel the shipping sector towards zero emission fuels. And the US and the UK are together establishing a taskforce to try and create green shipping corridors between the two countries. Also, the high level commitment to triple renewables globally should impact oceans. When we think about things like offshore wind and tidal generation. I think that private and public partnerships can play an important role here. They can do that in a number of ways, but when they work well, they can really mobilize larger amounts of capital than public sector can do on its own, or the private sector can do it on its own. This can be through creating direct joint ventures and partnerships. It can be through the public sector underwriting first losses or taking first loss provision. Equity markets also have a role to play.

Nick Trueman We have heard from Poppy around some of the discussions that took place at COP 28, Samy do you have any additional perspectives that you would like to share?

Samy Muaddi Yeah, I just want to underscore one point. I think we often think of water issues as being funded by the public sector. And I just want to spend a little bit more time elaborating why the private sector can also play a role there.

First, I've been investing in developing countries for almost 20 years now, and it's not lost on me that we're currently experiencing the most significant period of sovereign distress, probably since the 1980s, with high levels of debt in developing countries, and also higher interest rates because of the volatility in global inflation. So public sector balance sheets are constrained and cyclically therefore, it is quite important for the private sector to play a role here. As we shared earlier in our conversation there's no time to waste. Climate change doesn't wait for our debt issues to get resolved.

Second, there's a real opportunity on why the private sector can play a role in an area that I think most have traditionally thought of as public oriented investment.

Nick Trueman Let's stop there because we're going to be talking about innovations in blue financing in a future episode. We'll also be taking a closer look at some of the distinct water pressures threatening the blue economy in Latin America, and the implications of climate events like El Nino.

If I were to summarize today's discussion that the key takeaways are how important the blue economy is for our planet and our daily lives, but also how important it is for the global economy. At the same time, there are numerous challenges confronting global water resources, chiefly water scarcity, pollution and degradation. While there are global initiatives to help address these challenges, such as the UN Sustainable Development Goals, there remain real funding gaps to achieve them.

Samy/Poppy - thank you very much for the insightful debate and discussion that we've had today. I really enjoyed it and I hope our listeners have too.

Poppy Allonby Thanks, Nick. I look forward to listening to the other episodes of “The Angle”.

Samy Muaddi I enjoyed that. Thank you both.

Nick Trueman And thank you for listening to “The Angle”. We look forward to your company on future episodes. You can find more information on the blue economy on our website. Please rate us and subscribe wherever you get your podcasts.

This podcast is for general information and educational purposes only, and outside the United States is intended for investment professional use only. It does not constitute a distribution, offer, invitation, recommendation, or solicitation to sell or buy any securities in any jurisdiction, or to conduct any particular investment activity.

This podcast does not provide investment advice or recommendations, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision.

The views contained herein are those of the speakers as of the date of the recording and are subject to change without notice. These views may differ from those of other T. Rowe Price companies and/or associates. Information is based upon sources we consider to be reliable; we do not, however, guarantee accuracy.

The green bond market value is sourced from Climate Bonds Initiative’ (Climate Bonds’) Market Intelligence, which announced that USD2 trillion in green bonds had been issued-to-date, as of September 2022.

The amount of 5 to 7 trillion US dollars estimated in annual investment required to meet the UN SDGs through 2030, is provided by the United Nations.

This podcast is copyright 2024 by T. Rowe Price.

Nick: Welcome to ‘The Angle’ from T. Rowe Price ─ sharper insights on the forces shaping financial markets begin here. In this inaugural season of ‘The Angle’ we're diving into the world of the blue economy. I'm Nick Trueman and I’m your host as we learn more about this intriguing and rapidly evolving area of the economy and financial markets. In the series so far, we've had an introduction to the blue economy, learning about what it is and the threats and challenges it faces.

One current challenge is the return of El Nino, which is the focus of today's episode. Today, we'll be looking at how this weather phenomenon impacts water resources and more broadly, changing climate conditions in emerging markets. My guests today are Aaron Gifford and Willem Visser. Aaron is a sovereign research analyst and team leader in the fixed income team at T Rowe Price Associates. He makes regular visits to Latin America as part of his research, meeting policymakers, central bankers, and many others to see what's happening on the ground. Willem is an associate fixed income portfolio manager with a particular specialization in sustainable and impact investing. He has a wealth of investment experience and has undertaken several research projects looking at risks in and to emerging markets, such as permafrost melting and rising temperatures.

Welcome, Aaron and Willem, thanks for joining us today.

Aaron: Thanks Nick so much for having me on.

Willem: Thank you, Nick. Really looking forward to the discussions coming up.

Nick: Aaron, some of us have heard more about El Nino. Perhaps you can explain what it is and why, why we should all be interested in it.

Aaron: So really, in its most basic form, El Nino is a naturally occurring weather phenomenon where sea surface temperatures typically measure near the equator and the Pacific Ocean tend to be warmer than normal. It's part of what's called the Enzo cycle. Enzo standing for El Nino-Southern Oscillation. An El Nino typically occurs every 2 to 7 years and lasts for about a year or so on average. The cooler phase of the Enzo cycle is what's called La Nina. A bit of a fun fact. So, El Nino was originally discovered by Peruvian fishermen a couple of centuries ago. Back then, the fishermen would typically find every now and then that their catch was significantly diminished because of the warm water just off their shores, and particularly because they weren't able to receive that cold nutrients from deep in the sea.

They named the phenomenon El Nino, which in this case means Christ child, given the time of year that it typically appeared, which was around Christmas time.

Nick: Aaron, can you help us understand how it's impacting emerging markets? And what challenges does it pose for development?

Aaron: The reason El Nino is so important is that it disrupts ocean temperatures and weather patterns that can negatively impact everything from major fisheries off the coast of Peru, as I just mentioned, to crop yields in places like Asia and Africa, and to economic growth and inflation around the globe. And I would add, this time it's coming on the back of record temperatures worldwide, which is just, you know, magnifying the effect.

This El Nino has been less severe than what we've seen in previous large episodes, such as from 2014 to 2016, as well as the late nineties or early eighties. However, many organizations like the WMO, for example, still categorize the event as strong.

Just to give you a flavor of what we've seen so far from the current El Nino, I'd highlight that part of South America has seen torrential rainfall and flooding, while others have experienced drought. Some of the Andean countries, for example, declared a state of emergency last year due to the destruction that they experienced.

In parts of Asia - dry spells have also impacted crop production and even led to export restrictions of food staples in one of the largest economies in the region. There are a lot of moving parts, but I'm sure we'll dig into many of them during this podcast.

Nick: So, this really shows that the global impact you've talked about Latin America, you've talked about Southeast Asia. Perhaps one for Willem, so, what are the potential knock-on macro implications from extreme weather episodes?

Willem: Thank you, Nick. Actually, we're currently facing such a knock-on macro effect from the extreme weather, from actually an unexpected corner being the Panama Canal. So, in Panama, El Nino typically triggers dry spells and this caused this year insufficient rainfall. And this, combined with hotter than average temperatures, has led to a higher degree of evaporation of its lakes. And this in turn triggers lower water levels that flow into the Panama Canal. This canal we use for global trade. As a result, we've seen that the average number of daily ships passing through the canal have dropped from 37 to the mid-twenties. This is not only created long wait times, but according to Waypoint port services, passing slots or tickets to sail through the canal have gone up as high as $4 million per ticket versus $173,000 it was last year.

So, this really has a knock-on effect on inflation. We can see that the strongest El Nino’s tend to have coincided with higher than global average temperature changes. 2023 was the hottest year on record with temperatures 1.4 degrees above the pre-industrial average. El Nino is expected to remain strong and trigger more extreme weather events.

Nick: Willem, perhaps you can go into a bit more detail on what the impacts are, what are the things being observed?

Willem: The impact of these events become very visible through the disruption in agriculture and into the mining industry. If we look at the agriculture industry, dry spells can lead to bad harvests, lower crop yields. A reduction in crops pushes up prices with the biggest impact to those countries where food actually represents a large proportion of the CPI or inflation basket. And this especially happens in sub-Saharan African countries.

The world has already had to deal with plenty of inflation since the coronavirus pandemic, and El Nino can make it worse. At a minimum we've seen that several central banks, particularly in emerging markets, highlight the threat of El Nino for their inflation outlooks, meaning that interest rates could take longer to come down than what's justified by softening GDP growth.

Speaking about the mining industry, heavy rainfall and floods can also disrupt their supply chain. Any mine closures can lead to a high hit on growth in major producing countries such as Chile or Peru. And they can cause an increase in commodity prices with a knock-on effect that further tickles down the supply chain.

Nick: We've talked generally about where El Nino has its impact. And then we've had one specific example in Panama. But, Aaron, perhaps you could just dive into a little bit more detail on which countries are most exposed to El Nino.

Aaron: So, I would say Latin America is probably front and center when it comes to El Nino. You know, William did mention the likes of Panama. I would you know, include as well, the likes of Peru and Chile, both of which declared a state of emergency last year due to a localized El Nino event. Ecuador, for example, is also very vulnerable with some estimates of potential damages in a moderate to severe El Nino scenario totaling, you know, a few billion dollars. That's quite a bit considering the country's GDP is just north of 100 billion. And it also comes at a time when the country has had little room to maneuver, given its significant fiscal and debt issues.

Colombia, which shares a border with Ecuador and Peru, is also negatively exposed. But I'd highlight here that it tends to experience periods of drought instead of flooding during El Nino episodes. This is problematic for the country's agricultural and energy sectors, particularly hydroelectricity, which Colombia relies on for some two thirds of its energy needs. The current El Nino hasn't had the same kind of inflationary impact that Colombia experienced back during the 2014 and 2016 episode. But I would say that the risks are still front and center for the country's central bank that has already had to increase interest rates to historically high levels, you know, to fend off the existing pressures that they've already been facing.

Another part of the world that is particularly vulnerable to El Nino is the Indo-Pacific. In India, for example, an uneven and irregular monsoon season has caused inconsistent food supply, has pushed up inflation in key agricultural goods. It's also notable that the country decided late last year to ban exports of rice to protect domestic consumption. That has had negative knock-on effects for other countries in the region, such as the Philippines. Meanwhile, you've seen a prolonged dry season in places like Indonesia and even major forest fires in Australia. Nick: You mention Australia there, is there any distinction between how developed countries respond to El Nino effects?

Aaron: Now, I think it is important to highlight that the level of development of a country is directly related to its ability to withstand the effects of El Nino and climate change in general. So, while the developed world will be able to stand on its own two feet, at the end of the day, reality couldn't be any more different for, let's say, poor and low-income countries. Just looking at recent events in Somalia, for example, Ethiopia, we've seen hundreds of thousands of people that have been displaced by El Nino, even as those countries are already dealing with their own, you know, set of humanitarian crises such as hunger and disease.

So really, there are a confluence of factors, I would say, that need to be taken into account. But by and large, El Nino is a serious threat to many places and people in the world.

Nick: Well, we've heard that El Nino is associated with some real challenges, some negative impacts. But I understand that there are some potential benefactors from an El Nino phenomenon. Willem, perhaps that you can discuss some of the potential benefits or areas and parts of the world that do benefit in an El Nino year.

Willem: Absolutely. You touched upon an important point here, Nick. I think that's really important not to forget that there are countries that actually benefit from El Nino. These include countries that are susceptible to drought but experience greater periods of rainfall and are commodity producing countries. A great example in this case would be Argentina. Argentina just experienced historic drought and with the relief of the rainfall, which is obviously very welcome, has led to leading record soybean production. This is especially important given the challenging macroeconomic environment the country is facing, including depleted foreign currency reserves. Another example to think of is southern U.S. and northern Mexico. Both regions, again are susceptible to droughts, but El Nino brings increased rainfall, which does not only benefit the growing of limes, avocado crops in California, but also the rainfall triggers diminished tornado activity in the Midwest, sparing potential hits to GDP growth.

Similarly, in Mexico, plentiful rain reduced the number of hurricanes in the Gulf of Mexico, which brings stability to the offshore oil industry and boosts exports. Fewer hurricanes is also important for the small island nations of the Caribbean.

So maybe some anecdotal evidence of one my last trips to Chile late last year, I experienced firsthand that El Nino can bring unseasonably wet weather to the country. I know we cover this in another episode about water stress, but it's important to note that 23% of the Chilean installed power generating capacity is hydropower, and El Nino provides rain and snow, which keeps the reserves and water currents adequate for power generation.

So, this sector really benefits from a lot of rain and snow to the country. So, important to note that there are both potential winners and losers from El Nino. But in the wider context of climate change, almost all countries are likely to face challenges.

Nick: El Nino comes against the backdrop of rising temperatures due to climate change. How are emerging markets adapting to the challenges? Aaron, do you want to kick us off here?

Aaron: Yeah, sure. So, I would say that climate change is an ongoing struggle for many emerging markets. And, you know, as I mentioned before, the less developed the country, the more vulnerable it is to extreme weather events. The World Bank, for example, has highlighted that tens of millions of predominantly poor EM citizens could face extreme negative outcomes due to climate change.

And this includes food and water security and even forced displacement and mass migration. So, there's an ongoing global effort to deal with these issues, many of which have been highlighted during the recent COP 28 meetings held in Dubai, for example.

Nick: Aaron, you mentioned COP 28. For our listeners, perhaps you could just spend 30 seconds describing what COP 28 is.

Aaron: Yeah, absolutely. So, COP 28 was the 28th meeting in a series of meetings among global policymakers, the private sector, public sector, official sector. This one, in particular, was held in Dubai just recently. And you know, lots of things were discussed among, you know, many climate change and how emerging markets and low income countries are exposed, as we've been talking about on this podcast.

Nick: Thanks Aaron for that explanation, can you delve back into what developing countries can potentially do to help adapt to climate change?

Aaron: In terms of what developing nations can do to adapt to the effects of climate change, I think there are several options.

First and foremost, emergency preparedness is key, very powerful early warning systems have been developed, which governments should take full advantage of. I would also add upgrading poor infrastructure and addressing vulnerabilities in the agricultural, transportation, and energy sectors are also very important. This could include; anything from more sustainable irrigation practices, to using drought resistant crops, to implementing a more robust food storage, and distribution strategy.

On the energy side, the diversification of resources with a focus on renewable energy would also go a long way. Of course, the large majority of this requires financing, and as many of us know, emerging markets and especially low-income countries are ill prepared to foot the bill. This is why a coordinated global effort across the public, private and official sectors is so important.

We've already seen innovations in climate finance to channel resources toward mitigation adaptation strategies, whether, you know, through the public or even the private markets. Many programs for multilateral organizations are also in place to help countries in need, whether that's food assistance or special facilities to obtain emergency funds.

Nick: That's fascinating. Have you got any examples that you can share?

Aaron: I think one success story we should highlight in the context of climate change is once again Chile.

You know, this is a very diverse country with glaciers in the South and the vast Atacama Desert in the north. The country, for example, was one of the first ones globally to launch an ESG financing strategy with a variety of green, social, sustainable, and sustainability linked bonds. With those proceeds, you know, going toward everything from, lowering greenhouse gas emissions, to important projects in the transportation and energy sectors. On a very practical basis, you have even seen a shift in the government's approach to water stress with the development of several desalination plants to reduce the mining sectors reliance on fresh water.

This is an important advancement in a country that is frequently dealing with drought. There are several examples of countries making a successful effort in tackling climate change, and I think with the current El Nino phenomenon and record temperatures around the globe, those efforts will just continue to gather pace.

Nick: That brings an end to today's session. I want to thank Willem and Aaron for your input on the El Nino episode. Thank you very much.

Willem Absolutely. My pleasure.

Aaron: Thank you, Nick.

Nick: The key takeaway for me is that El Nino exacerbates already changing climate patterns, which poses risks for emerging markets and their water resources. There's a growing tension between human consumption in parts of the world where the population continues to grow and companies that also rely on water for many of their processes. Looking ahead to the rest of the season will feature a look at another emerging challenge facing the blue economy, which is water stress in Latin America.

Thank you for listening to the angle. We look forward to your company on future episodes in this season.

This podcast is for general information and educational purposes only, and outside the United States is intended for investment professional use only. It does not constitute a distribution, offer, invitation, recommendation or solicitation to sell or buy any securities in any jurisdiction, or to conduct any particular investment activity. This podcast does not provide investment advice or recommendations, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision.

The views contained herein are those of the speakers as of the date of the recording, and are subject to change without notice. These views may differ from those of other T. Rowe Price companies and/or associates. Information is based upon sources we consider to be reliable; we do not, however, guarantee accuracy.

International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. These risks are generally greater for emerging markets.

Bonds are subject to credit risk, liquidity risk, call risk, and interest-rate risk. As interest rates rise, bond prices generally fall.

There is no assurance that any positive environmental or social outcome will be achieved.

There is no guarantee that any forecasts made will come to pass.

This podcast is copyright 2024 by T. Rowe Price.

Nick Trueman

Welcome to “The Angle” from T. Rowe Price. Sharper insights on the forces shaping financial markets begin here.

In this inaugural season of the angle, we're diving into the world of the blue economy. I'm Nick Trueman and I'm your host as we seek to learn more about this intriguing and rapidly evolving area of the world economy and sustainable financing.

In other episodes in the series, we've focused on the importance of the world's water resources for economic development, and the threats they're facing. Today, we're taking a new angle - the role of financing in the blue economy ecosystem. Specifically, we're delving into the evolution of blue financing as a vital tool to support sustainable development of the blue economy.

My guests today are Samy Muaddi and Matt Lawton. Samy is head of Emerging Markets Fixed Income at T. Rowe Price, and an adjunct professor at Georgetown University. Matt is a fixed income impact portfolio manager at T Rowe Price. He has extensive industry knowledge, and for the last several years has had a laser focus on impact investing - itself an area of innovation in finance to support sustainable initiatives.

Samy, Matt, thanks very much for being with me today.

Matt Lawton

Thank you, Nick. Thank you, Samy, Nice to be with you.

Samy Muaddi

Thank you both. Great to speak.

Nick Trueman

So Matt, let me start with you. We’ve learned about the blue economy and its importance to global economic activity, jobs, communities. We know there are major funding gaps when it comes to supporting sustainable initiatives in this area, particularly those that can help address the United Nations Sustainable Development Goals or SDGs. How are innovations in finance working to help plug these gaps?

Matt Lawton

Sure, Nick, thanks for the question. As you rightly note, despite all of the efforts and investments that have taken place over the years, the United Nations Sustainable Development Goals, or SDGs, remain severely underfunded. According to a U.N. report published in July of 2023, there's yet still an estimated $4 trillion annual funding gap that needs to close to reach the global SDG targets by 2030.

Funding in support of these SDGs can come through both public as well as private sector channels. And one funding mechanism that can serve as a bridge to the SDGs are what are known as ESG use of proceeds bonds. Examples of ESG use of proceeds bonds include green bonds, social bonds, and sustainability bonds. These are debt instruments where proceeds are used to finance discreteenvironmental, and, or social projects that in turn hopefully produce positive impact outcomes, again in support of the 17 U.N. SDGs.

Now, the very first of these markets to develop was the labeled green bond market, and that began in 2007 with the European Investment Bank issuing what was known as a climate awareness bond, which was used to fund environmental projects. And in the time since, we've seen tremendous growth, advancement, and innovation within the space. We've seen the advent of social bonds which finance social projects such as affordable housing, microfinance lending, as well as sustainability bonds, which finance both environmental as well as social projects.

We've also seen the universe of issuers expand in terms of both depth and breadth. We now see ESG bonds in diverse markets, from sovereigns to corporates to development banks, to asset backed issuers, just to name a few. And one more recent example of innovation within the ESG bond market would be blue bonds. And blue bonds, which are a subset of green bonds, are debt securities, where proceeds are used to finance initiatives promoting ocean friendly projects and critical clean water resources protection. And I would say interest, engagement, and enthusiasm around blue bonds has been noticeably increasing within the capital markets, specifically among issuers, investors and underwriters. And that's really exciting, because the market is starting to view blue financing now as a potential accelerant in helping to drive further growth and innovation within the broader ESG bond market.

Nick Trueman

Samy let me bring you in here. As Matt has explained, blue financing is a relatively new concept. Can you describe the nature of the market and its potential to help address the needs of sustainable development?

Samy Muaddi

Thanks, Nick. Let let's take a step back here. I always think history can be informative. So, before the United States was even formed in 1774, one of the first pieces of paper debt obligation issued was for the New York colony issued by the New York Waterworks Authority. It was meant to fund a steam engine, water storage, and distribution for an expanding colony. So actually the first blue bond is quite old, and I think what Matt and I are talking about here (blue finance) is maybe more in its modern incarnation.

And why are we here today? I think we are here as a financial community to help amplify the existing work of scientists, and academics, and policymakers, and civil society representatives. I think awareness about the importance of water resources, in my mind, I always think back to that image from space The Blue Marble 1972. And so, there is a foundation of existing work built on this. However, the human population has more than doubled since that photo was taken. So our usage of water resources, and then obviously the impacts of climate change is 90% of excess energy retained by Earth is absorbed by the ocean. We know the impact that has. The impact is expanding faster than the resources addressing it, and so it's our responsibility as a financial community to try to amplify that work and to participate in a solution here.

Now, historically, green bonds have tended to dominate the ESG labeled bond issuance. Blue financing, I understand, as I said in its modern incarnation, is new, but we absolutely see it gaining momentum. Water is a unifying theme in this industry. It's tied to our history, our culture, our communities, and we believe the blue bond market is at a tipping point. And as Matt suggests, maybe it mimics where that green bond market was 10 to 15 years ago.

These projects have been historically underfunded. And I would just really highlight the urgency here. Time is not on our side, and we seek as a financial community to again amplify the existing work that's happened for decades from other members of the ecosystem here.

Nick Trueman

Thanks for that Samy. From an issuer’s perspective Matt - what are the main objectives of issuing blue bonds?

Matt Lawton

That's a really important question, Nick. So why would an issuer even consider issuing a blue bond in the first place? In my conversations with capital market participants, again, issuers, investors and underwriters, three themes have surfaced to this question. So one, Blue Bonds can potentially offer access to a larger and more diverse investor base, thereby providing a deeper pool of funding and secondly, issuing a credible and ambitious blue bond could lead to reputational benefits from an issuer's perspective. That is, blue Bonds can provide a positive signal, from the issuer to the capital markets, that sustainability is a strategic priority for the enterprise. And for some investors, that may be an important consideration in deciding whether to purchase the bonds.
And then lastly, potential internal benefits for companies issuing blue bonds as well, such as more deeply embedding sustainability and water considerations into corporate culture, business decisions, providing the ability to better identify and manage risks in terms of how water affects their enterprise from both an operational, as well as financial perspective.

So again, although the market is in its nascent stages today, I think there are a number of noble considerations as to why we should expect to see issuer interest increase going forward.

Nick Trueman

So Samy from Matt we've heard about issuer interest increasing, and some very logical and thoughtful reasons behind that. Perhaps you can touch on some of the areas where blue financing is needed. Is it in specific countries, in specific regions, or specific segments? So perhaps you can dive into some of that, please.

Samy Muaddi

Yeah, Nick, the short answer is everywhere, and I think I'm going to run out of time going through all the details on it but let me give it a shot. Northern Africa and Western Asia are absolutely water stressed regions, and this can have a significant impact and lead even to civil unrest if unaddressed. And Latin America needs are more focused on aquaculture and agriculture. Asia must contend with elevated levels of plastic pollution. If we translate that to the sector level - transportation, nearly 80% of international trade of goods is transported by ship. Marine transportation of goods, as well as passengers, is a significant contributor to greenhouse gas emissions. Transitioning the sector to low carbon could require over a trillion dollars of investment to upgrade those fleets to alternative fuels.

Let's transition now to agriculture. Huge water consumer - demand for agriculture and aquaculture is going to remain high. As I mentioned, the global population that we haven't built the infrastructure to handle as many people as we have today versus 30, 40 years ago when some of this infrastructure was built. These water intensive industries will need investment to become more sustainable. Agriculture accounts for 70% of freshwater usage. Aquaculture is a substantial food source for much of the world. So to keep up with that demand, sustainable aquaculture is going to need nearly $200 billion in capital investment over the next ten years.

If we move to utilities, maybe let's just start with a human story. On some of my trips to Brazil, we've gone into favela communities, so these are the communities built on hills. And I could just tell you limited experience, but firsthand experience, it's tough to get clean water uphill and then there's a huge problem of dirty water coming downhill, and that impacts people every day. We have the technology to fix that, it just needs to get funded by water utilities.

Access to clean, reliable water effective waste management is really critical and essential to human life. Access to clean water is a human right as passed by the UN General Assembly in in 2010. And then governments certainly have invested in projects to curb ocean pollution, but I would just point out we're in a significant period of sovereign debt distress, probably the most significant period I've seen in my 18-year career. Probably the most significant in the industry for the last 30 or 40 years. And so the public sector balance sheet is constrained because of high debt burden and higher interest rates. So I think there's room for the private sector to be part of the solution here and something we can continue to expand on in our conversation.

Nick Trueman

I want to talk about governance. So both Matt and you have explained that blue bonds are at an early stage of development. There has been a lot, quite rightly, probably in the press around greenwashing in recent years. So greenwashing is the idea that something labeled as having green or environmental credentials may not live up to those claims.

There is significant discussion and debate around what qualifies as green or in this case, what qualifies as blue. I've heard these concerns myself. Is there a problem with blue washing? So perhaps, Matt, I can, I can start with you to talk about regulation, standards within the industry, and how we can tackle some of these issues.

Matt Lawton

Sure, Nick. Just to maybe level set in terms of how we define this term greenwashing or blue washing, as you say. This could be an issuer or even an investor that's misstating or even overstating their sustainability principles or asserted outcomes. An example could be an issuer raises funds through a blue bond, communicates to the market an intention to deploy those proceeds into a specific project, and turns out they use those proceeds for something else that maybe wasn't as particularly impactful as we thought.
And without doubt, we have seen instances of greenwashing or blue washing where we'll say parties have fallen short living up to their external messaging or external promises that they may have previously conveyed to the market. And in some ways, I think this is a consequence of the environment that we're in where ESG labels have been applied quite broadly, and in some cases quite liberally. Beyond regulation, industry groups such as the International Capital Markets Association, abbreviated ICMA, have provided guidance to the markets and on certain aspects of ESG bonds, at least such as impact reporting and measurement that's helping to elevate those standards. So it's my expectation that that over time we'll see certainly these regulatory frameworks evolve and it's certainly my hope that we'll see standards continue to strengthen.

Investors have to do their part, too. And we believe it's important that, you know, investors carry out their own independent assessment of these blue bonds to ensure that they are credible, ambitious, and believed to be free of any sort of blue washing. Impact investing is one channel that can be part of the solution.

Nick Trueman

Matt/Samy - thank you so much for your engagement on this really important topic today. I've really enjoyed the discussion.

Matt Lawton

Thanks Nick. Thank you Samy.

Samy Muaddi

Thank you Nick. Thanks Matt.

Nick Trueman

If I were to summarize the key takeaways from today are blue financing is going to play a key role in initiatives to enable more sustainable development of the blue economy. But there are big challenges, especially around substantiating and measuring outcomes, and that's why it's very important to have a robust process in place to help mitigate potential risks.

It sounds like the opportunity to create positive environmental and social impact is greater than ever.

Thank you for listening to “The Angle”. We look forward to your company on future episodes.

You can find more information on the blue economy on our website. Please rate us and subscribe wherever you get your podcasts.

This podcast is for general information and educational purposes only, and outside the United States is intended for investment professional use only. It does not constitute a distribution, offer, invitation, recommendation, or solicitation to sell or buy any securities in any jurisdiction, or to conduct any particular investment activity.

This podcast does not provide investment advice or recommendations, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision.

The views contained herein are those of the speakers as of the date of the recording and are subject to change without notice. These views may differ from those of other T. Rowe Price companies and/or associates. Information is based upon sources we consider to be reliable; we do not, however, guarantee accuracy.

The $200 billion in capital investment to support sustainable aquaculture over the next 10 years was part of a 2019 report by Nature Conservancy.

There is no guarantee that any forecasts made will come to pass.

Bonds are subject to credit risk, liquidity risk, call risk, and interest-rate risk. As interest rates rise, bond prices generally fall.

There is no assurance that any positive environmental or social impact will be achieved.

International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. These risks are generally greater for emerging markets.

The incorporation of environmental and/or social impact criteria into an investment process may have different results than if the criteria was not included, or is applied differently.

This podcast is copyright 2024 by T. Rowe Price.
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Nick: Welcome to ‘The Angle’ from T. Rowe Price ─ sharper insights on the forces shaping financial markets begin here. In this inaugural season of ‘the angle’ we're diving into the world of the blue economy. I'm Nick Truman and I'm your host as we learn more about this intriguing and rapidly evolving area of the economy and financial markets.

In the series so far, we've learned about the importance of the blue economy for countries, communities, and global economic activity. There is enormous potential for sustainable development of the blue economy, but it’s under threat from a range of challenges confronting ocean and clean water resources.

Today, we're going to explore one of those challenges in more depth ‘Water Stress in Latin America’. Latin America accounts for around 30% of the world's freshwater resources. But mismanagement, exploitation, pollution, and climate change related impacts are increasing the region's water insecurity. So, the two guests I have joining me today are analysts Mariel Abreu and Duncan Scott. They've worked on this very research topic, so it's great they're able to join us and share their insights today.

Welcome Mariel and Duncan.

Mariel: Thank you Nick for having me here. Very excited to talk about this topic today.

Duncan: Yeah. Thanks for hosting Nick, really important topic and happy to be part of the discussion.

Nick: Water is vital, yet the risks of not having enough are often overlooked. A good starting point to our discussion today is to take a step back and explain to our listeners why today's topic of water stress is so important. Mariel, why don't you start with a discussion on the supply and demand dynamics?

Mariel: Yes, Nick, thank you. That's a very good way to start the discussion. So, let's start with the problem of supply. Water is one of the most valuable natural resources and necessary for human life. 60% of human body is formed of water, and we cannot go without it for more than three days. It's also very important input for major industries that play a relevant role in the everyday life, from food to energy.

So, to put this in context for the audience, 75% of our planet is covered by water, but only 3% of this water is fresh water, and only 1% of that is water that we can actually use for human and industry consumption.

Nick: Gosh, only 1%. That’s is, that’s quite a shockingly low number.

Mariel: Another relevant factor is that there is a high distribution imbalance in freshwater supplies in our planet.

Only 10 countries in the world account for two thirds of the total freshwater resources we have. So, that is the first issue, we have a shortage in water supply in our planet, and not only the quantity, but also the quality has been declining over time.

Climate change is also another cause of water stress. When we look at the water stress levels, which basically measures water withdrawals to available water supply in our planet, the metric has been worsening over time all around the world.

And this is in part due to the high temperatures that we are experiencing. And this will continue to deteriorate over time as we have higher temperatures and the droughts become more frequent. I'll give you interesting data points. For every one degree increase in average temperature, there's a 20% decline in water resources.

Nick: Wow, that is a very interesting data point on rising temperatures and water supply. What about the demand side dynamics for water?

Mariel: Yeah, sure. So, on the demand side, water use has been increasing at more than double the rate of population growth, according to United Nations. The growing global population is expected to reach around 10 billion by 2050, which implies greater food and energy demand, which are two industries that are heavy users of water.

So, water stress will be one of the top challenges for humanity in the next decade and one important risks to global GDP growth. The World Resources Institute, for instance, is estimating that around 30% of the world's GDP will be exposed to high water stress by 2050, and around half of the world population is projected to live in water stressed regions.

Nick: Goodness me, those statistics are pretty stark. So perhaps I can bring in Duncan here. So how does water stress link to the sustainable development goals?

Duncan: Yeah, thanks, Nick. I mean, there's also this material funding gap when it comes to water. So, if you look at the United Nations Sustainable Development Goals or SDGs. And for those not familiar with those. So, there are 17 goals to end poverty, protect the planet, and ensure prosperity. And each of these goals has specific targets to be reached between 2015 and 2030.

And the two goals linked to water, so SDG number six and SDG 14, are among the most underfunded sustainable development goals. And I think the finance industry can potentially play a key role here in helping to move the dial to catalyze investment into supporting these SDGs. And, you know, despite how crucial water is to human life and business, the risks that come with not having enough of it are often being overlooked by investors.

Nick: As you've both outlined, water is critically important. It's a strategic asset in scarcity. Mariel, why so much focus on Latin America? Are there already signs of water scarcity in Latin America?

Mariel: Yes, you're right Nick. And similar to other parts of the world, Latin America is also experiencing the effects of water scarcity. The region has around 30% of the world's renewable water resources, but it is also one of the regions facing one of the greatest water stress in the world. So as part of our recent research on water, we look at data from the World Resources Institute and Chile and Mexico, for example, came up among the highest water stressed countries in the world today. And this is the result of climate change, exploitation, and high polluting activities in the region.

Nick: So, Mariel, can you drill down and give us some more specific examples?

Mariel: Yes. So, we have started to see the effects of this issue in the form of higher social unrest and greater government pressure. Also increasing restrictive regulation to protect and secure water for human consumption in Latin America. In fact, water related events have become more violent and frequent in the region in the last decade.

Let me give you two examples. In Chile, water has become a national security issue. If you look at hydrology has been sequentially declining in the last decade. And in 2022, the Chilean government announced a plan to ration water for the capital of Santiago for the first time in history.

Another example is Mexico, where we've seen a lot of protest a few years ago over the federal government decision to relocate water flows to comply with international obligations of water transfers. And these caused people to block roads for more than a month that resulted in huge losses for companies in that location.

Nick: These are clear signs that water stress is already having an impact in certain countries given that water availability is expected to continue declining in the coming years, there's a risk these events become more frequent and potentially even more severe. Duncan, what are the potential knock‐on implications?

Duncan: As we look forward, there is definitely concern that these events could become more frequent. I mean, as we've kind of discussed, water availability is declining, populations are growing, water stress is increasing. So, this declining water security could worsen conflicts between social groups or between industries. I mean, essentially, we have these growing populations, plus economies that are industrializing.

Plus, industries are growing and consuming more water. And all these people, industries competing for access to supplies of water that are decreasing. So, I mean, if you have an industrial user, so, you know, a pulp mill or a power station, that's consuming huge quantities of water at the same time that the population is having its water use rationed, it creates a potentially very challenging dynamic between population, industry, and political parties who are the ones who have to enact and enforce water use regulations.

So, yes, it's challenging dynamic and it potentially also raises the risk of political instability as well in certain countries where this is a particularly acute risk. Yeah, and I think this definitely has knock on implications for companies and issuers and regulation.

Nick: Mariel, Duncan referenced possible or probable rise in regulatory risk. Can you put a bit more color around that, please?

Mariel: Yes, that's right. Companies will be more exposed to water related operational challenges going forward. And one of the reasons will be restrictive regulations, as Duncan mentioned, because there's increasing social pressure to improve water security for human consumption. So, when we look at Latin America, for example, all countries have a maximum volume of water extraction to which industry players must comply by regulation.

Nick: So, Mariel what types of industries and companies are we talking about here that are going to be most impacted?

Mariel: Agriculture is the most exposed to this risk since it represents almost 70% share of water usage in Latin America. The energy sector is also a heavy user of water. In Latin America, for instance, the matrix, generation matrix is almost 50% hydro, which is directly correlated to hydrology conditions, and even thermal plants are very water intensive since they use water for cooling to be able to operate.

Nick: So, for companies operating in these sectors, Mariel, are there any potential financial implications? So, are they going to need to change production methods or invest in new equipment to become more water efficient?

Mariel: Yes, Nick, you are right. There are potential knock on financial implications. Companies will need to become more water efficient. So that is likely to mean investing in new equipment and changing production methods. Let's take the Chile example.

In the last five years, hydro generation in Chile has been around 30 to 45% lower than projections, which means these companies have been producing more with thermal facilities, which in turn results in a very material pressure to margins. So, one of the things that we're seeing in the Chilean segment is that these companies are investing more in renewable energies and basically diversifying their matrix away from hydro plants.

Nick: Duncan, that's some really fascinating insights from Mariel. What approach can be taken to assess if a company is vulnerable to water risk?

Duncan: Yes. So, I think the first thing I'd highlight again here, Nick, is that water stresses is not evenly distributed globally. So, it's very much a localized issue. So even though several parts of LatAm face high levels of water stress. So, you know, we mentioned Mexico and Chile. There's other countries in the region that have much better water security.

So, in these countries, water related risks maybe are not such a material concern. Maybe those that are more tropical climate or a long‐wet season, so somewhere like Panama, for example.

So there’s big variations in water stress across the different countries in LatAm, But, then even within a country, water stress can vary widely. So, again, taking Mexico as an example, averaged across the whole country, Mexico looks pretty water stressed. But actually, in the south of the country, you again have quite a tropical climate and there's actually relatively low water stress in the South. So, some areas in the north, much more arid, much more desert like, I mean, these areas can be very water stressed and that's where water scarcity is a real issue.

So, what this means is that looking at country level averages for water stress and for water availability is probably not the best approach, especially for these large Latin American countries with very varied terrains and climates, so, Mexico, for example. Using geo location data can potentially be a better approach in the analysis of water risks for a company. Essentially this means analyzing water availability and water stress at the individual asset level across an issuer’s entire asset base.

So, looking at the level of water stress at the precise location of an issuer's production facility or factory or mill or whatever it is, rather than looking at this country level average data for water availability.

Nick: Duncan, I understand you've spoken with companies that are potentially vulnerable to water stress. Mariel, you've been on the ground visiting these companies. What are your high‐ level takeaways from these meetings and visits?

Duncan: Yeah Nick, so we've spoken with, with companies across many of these sectors in Latin America to understand how they're attempting to mitigate water related risk, essentially. This includes, you know, how they're changing their practices and operations to reduce water use, whether they're able to switch water sources for a particular asset. And in particular, things that can lower freshwater use, so whether that's, desalination equipment or upgrading cooling systems. And a big part of our discussions with issuers focused on oversights of these issues. So, so who's responsible for assessing and managing these water related risks at a company. We spoke to a number of major issuers across these industries, across numerous countries in Latin America, some of whom are facing serious challenges from water stress to date, others of whom were less materially exposed.

Our takeaways from meetings is that these management teams are highly aware of water related risks. Broadly, they're taking steps to mitigate this risk and to minimize their water footprint. I think there's been so many issues related to water scarcity in Lat Am that we've touched on today in the last few years, that this issue is very much front and center for many of the management teams.

Nick: Mariel, I understand that you were recently in Brazil, and you've got some insights that you can share.

Mariel: Yes, I just came back from a week in Brazil visiting water utilities and Brazil is a good example of a country that has been under‐investing in this sector in the last few decades. Just to give you some reference, around 12% of Brazilians don’t have access to water and around 45% doesn't have sewage collection and treatment.

Brazil has to reach universal sanitation coverage to 99% in the next ten years. That has an estimated investment amount of around $180 billion, and the private sector, which only serves around 25% of the total population, will play an important role to help reach this target, especially in the sewage segment.

Nick: That brings an end to today's discussion. Mariel, on behalf of our listeners thank you so much for providing your insights.

Mariel: Thank you, Nick. It's been a pleasure to be here.

Nick: And, Duncan, thanks so much for sharing your insights as well on this really important topic.

Duncan: Yeah, thanks for having us today Nick, really enjoyed the discussion.

Nick: Looking ahead to the rest of the season we’ll deepen the discussion around the blue economy. We’ll explore how sustainable objectives can be measured. The key points I learned from the discussion today are the rising risks of water stress in Latin America and that certain industries and companies are going to need to find new processes become more efficient with their water use.

Thank you for listening to the angle. We look forward to your company on future episodes in this season.

You can find more information on the blue economy on our website. Please rate us and subscribe wherever you get your podcasts.

This podcast is for general information and educational purposes only, and outside the United States is intended for investment professional use only. It does not constitute a distribution, offer, invitation, recommendation or solicitation to sell or buy any securities in any jurisdiction, or to conduct any particular investment activity. This podcast does not provide investment advice or recommendations, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision.

The views contained herein are those of the speakers as of the date of the recording, and are subject to change without notice. These views may differ from those of other T. Rowe Price companies and/or associates. Information is based upon sources we consider to be reliable; we do not, however, guarantee accuracy.

International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. These risks are generally greater for emerging markets.

There is no assurance that any positive environmental or social outcome will be achieved. There is no guarantee that any forecasts made will come to pass.

This podcast is copyright 2024 by T. Rowe Price.

Nick: Welcome to ‘The Angle” from T. Rowe Price. ─ shaper insights on the forces shaping financial markets begin here. In this inaugural season of ‘the angle’ we're diving into the world of the blue economy. I'm Nick Truman and I'm your host as we learn more about this intriguing and rapidly evolving area of the economy and financial markets.

In other episodes in the series, we focused on the importance of the world's water resources for economic development and the threats they're facing. We've also discussed how innovations in finance are working to support sustainable development efforts in the blue economy. Today, we're going to build on the discussion around sustainable investing. In particular, we're asking how feasible is it to measure impact in sustainable investing and how can we tell if the targets of sustainable investing are meeting their sustainability objectives over time?

Joining us for this discussion are two experts in impact investing and sustainability, Matt Lawton and Tongai Kunorubwe. Matt is an Impact Fixed income portfolio manager and Tongai leads on sustainability in Fixed Income at T Rowe Price Associates.

Welcome Matt and Tongai.

Matt: Thanks, Nick. Happy to be here.

Tongai: Looking forward to the discussion.

Nick: Well, gentlemen, perhaps we should start with some definitions of key terms for our listeners. Matt, what is impact investing? And once we've got our definition, we can then move on to how impact can be measured.

Matt: Sure. Thanks, Nick. So just to provide a level setting definition. Impact investing refers to investments that are undertaken with the intentionality that they will generate both financial return and measurable environmental or social impact, and that those two objectives sit in equal priority to each other.

Nick: Okay. Tell me more about the financial and the non-financial. It's interesting to see that you've split those two.

Matt: If I just double click on that impact objective, there are two things to keep in mind. One is the focus on external impact or the real-world outcomes that an issuer or project are helping to deliver. And second is measurability. So, investments would typically carry a non-financial key performance indicator or KPI, such as greenhouse gas emissions avoided from renewable energy generation or number of jobs created from microfinance lending, for example.

When measuring impact of an investment, the objective is to ascertain whether that impact is authentic, and also the project can deliver the positive outcome that it is striving to achieve. One channel for pursuing potential impact in public fixed income are ESG labeled bonds. So, these could be green, social, or sustainability bonds, which are debt instruments where an issuer can raise capital to finance discrete environmental and/or social projects that in turn can hopefully help yield positive, measurable impact outcomes. It's important to evaluate before investing if the project is credible and seeks to achieve additionality. For those not familiar with the concept of additionality, this refers to efforts that help generate positive impact or a positive outcome that otherwise would not have occurred without additional resources or capital investment

So, an example here could be the number of social housing units that would not have been financed or cubic meters of water that would not have been saved, among other examples. Aside from all of these issues that are considered upfront, it's also critical throughout the lifecycle of a bond transaction to continue monitoring and measuring impact in order to identify whether the issuer or company is indeed delivering on their intended sustainable objectives.

Nick: Okay. So, a bond with a label is linked to a particular sustainability project or goal. For example, a green bond is linked to the green economy and a blue bond is linked to the blue economy. Does having a sustainable bond label ensure that a bond is authentic and seeks to achieve a positive impact Tongai?

Tongai: So, Nick, thank you. It's a very good question. A label gives no guarantee about the quality and authenticity of a bond. It is worth noting that in instances sustainable labeled debt can be self-labeled by the issuer itself, of course, having taken advice from underwriting banks and advisors.

Now it's also important to remember there is no global compulsory standards for issuing debt with the label. Although most companies typically follow the International Capital Market Association or ICMA for short ─ guidelines for issuing, such as the Green Bond, or the Social Bond Principles.

There is certainly room for different interpretations by companies. Just to be clear, ICMA, is a self- regulatory organization which represents financial institutions globally.

Now, explicitly, whilst green, social, or sustainable bond frameworks typically list target allocation categories, these are non-exhaustive Nick. And these frameworks, to be clear, are not legally binding in the strictest sense of the word. Hence the need arguably for more detailed diligence. That's why it's important to evaluate the credentials and measure the impact of bonds which carry a label, such as Blue, which are used exclusively for funding, refinancing, ocean friendly and other clean water projects.

The key to unlocking the potential for the blue economy is a credible and functioning blue bond market. Measuring impact is arguably paramount to that.

Nick: Tongai, can you provide more detail on what is involved in measuring the impact of a blue bond?

Tongai: Yeah, absolutely. So just building on the previous question you asked. Blue bonds do require additional rigor and analysis. There are four key areas that are important to consider when measuring the authenticity and impact of a blue bond. And I'll go through these. First, the issuer’s sustainable investing profile. It is important here to examine the company or issuers overall sustainability profile, whilst assessing future ESG targets and their credibility.

Nick: Just to jump in there, Tongai. Tell us a little more about the sustainable investing profile.

Tongai: Okay. Nick. So that's a very important intervention on your part. If you step back and think about it, we have to have compatibility with the issuer's overall strategy and sustainability position and the actual bond they are looking to bring to market. Now, oversimplifying to make the case, it would be very strange to have an issuer where the water intensity metrics or some of the controversies that are tracked by the industry, for example, around ocean health, are at quite material or are coming out quite materially different to what they are claiming to be doing within the bond itself.

And that's the point we are making with this first point around the harmony of the issuer evaluation, its strategy, and the actual bond that they are bringing to market. I hope that helps.

Nick: That certainly does. Thanks, Tongai. Back to the four areas, I think you were about to tell us about the second area.

Tongai: Yeah. Second, alignment with industry standards. It is important to examine the alignment with industry standards and current best practice Nick, including recent guidance provided quite helpfully, again by ICMA on issuing blue themed bonds.

Third, bond credibility, and here it's important to step back and examine the credibility and ambition of the issuers financed project, as well as evaluate how proceeds will be managed throughout the life of the bond.

And fourth. But certainly, by no means last or least ─ post issuance reporting is quite important, Nick. It's important to examine the issuers post issuance reporting, for example, is the issuer providing sufficient allocation and impact reporting in its reporting?

Nick: Matt, Tongai has outlined these four areas, which are important to the evaluation process of a blue bond. Can you really demonstrate additionality and/or impact through these investments? Maybe just to dive in, give us some examples.

Matt: Sure, Nick. It's a good and important question because it is really important to be able to substantiate potential impact. For investments that focus on the blue economy one could argue there is both an opportunity to capture that real world impact and also be able to evidence it through robust measurement.

Within credit impact investing, labeled bonds, such as blue bonds, may specify the use of proceeds at the outset. So, what that means is the capital that’s being raised, how it’s being designated to particular environmental or blue projects. Measuring the impact outcomes are of course important as we've discussed, but analysis need not stop there.

Engaging and working with companies is also important and this process can help guide, strengthen, or accelerate their impact progress or their impact journey. It can be particularly useful for investors and capital market participants to provide guidance or views on impact or labeled bond frameworks and standards or key performance indicators, in an effort to push for acceleration toward an existing indicator or target. Although, of course, it's never guaranteed, one could argue that seeking alignment between investor and issuer can offer a higher probability of success. In this case, success defined as outcomes that are material, measurable, and additional.

At the same time, issuers and investors can work together to improve collective market wide standards and practices. And I think, this this last point on standards and practices, is particularly important for blue bonds, given the market is still in its infancy.

Nick: Just to go a bit deeper there, I mean, blue bonds are very new Matt. And I often hear about the challenges of data availability when seeking to measure impact. So, what's the data availability like? How much is qualitative versus quantitative? Perhaps, let's go into a bit more detail there, please.

Matt: Sure. Although, data to measure impact today certainly remains challenging and incomplete in some instances. We are seeing coalescence around what the market would consider to be best practices. One useful tool for measurement is ICMA's harmonized framework for impact reporting that details core impact indicators to specific projects. For example, a project that's focused on sustainable water and wastewater management, a core indicator here would be cubic meters of water saved. If it's a project like living natural resources and land use projects, an indicator could be increased percentage in certified sustainable fisheries. Or, if it's a project focused on biodiversity, square kilometers of safeguarded coastline could be a useful indicator.

Also, IFC or International Finance Corporation recently published guidelines for Blue Finance, and that provides a comprehensive list of eligible blue project categories that could fit within in the description of a blue bond.

And lastly, we recently saw a document which was the practitioners guide on bonds to finance the sustainable Blue Economy. This was a piece that was collaboratively written by IFC, Asian Development Bank., ICMA, and the U.N. to guide prospective issuers, investors, and underwriters on blue bond transactions. Even as these standards are increasingly understood and digested by capital market participants, we still expect engagement to play a role. Again, directly engaging with issuers to help verify the blue projects, whether they meet the standards for materiality, measurability and additionality should also be considered.

Nick: So Matt, does this demonstration of impact really address some of the skepticism that we hear around sustainable investing?

Matt: Sure, Nick. We certainly appreciate and are aware that there is some skepticism around ESG. Issues like corporate behavior, financial product labeling, and greenwashing are just some of those issues driving that skepticism. It's important to remember that impact is distinct from the more generic description that is ESG. Such that impact is uniquely focused on outcomes and not just outcomes, but measurable outcomes.

So, in that sense, some might consider impact to be really the purest expression of investing within the broadly defined sustainability space.

Nick: As you think about where the market is today from an impact measurement perspective and how new it is, but how far we've come in a short period of time, what excites you as you look forward? Tongai, let's start with you.

Tongai: Yeah, absolutely, Nick. So, I think a couple of things are quite exciting here. I think it's important to recognize the increased level of enthusiasm from both investors and issuers to help solve for some of the critical environmental issues that we're facing together. You take that enthusiasm and accompany it with a much better understanding and clarity on what a quote unquote, “credible impact bond” looks like and I'm very hopeful we'll see standards continue to elevate. And that's very encouraging for the wider group of stakeholders, whether it's asset owners, investors, issuers, and importantly, the environment. So, to summarize, the excitement really has a lot to do with the potential to positively influence real world outcomes in these arguably mission critical areas for us all around clean healthy oceans and drinking water respectively.

Nick: Matt, perhaps I can bring you in here.

Matt: Certainly, we all understand and appreciate that the blue bond market is still very much in its infancy, but there's also a lot of things to be excited about; standards, data availability, data accuracy, all improving as well as overall capital market awareness of the blue economy. And I think you couple that with the need for scaled investments into the blue economy in helping to solve for some of these critical environmental issues.

Nick: That brings an end to today's discussion. Thank you, Tongai, and Matt for your time today.

Tongai: Thanks, Nick, and thank you to your listeners as well. It's been a pleasure to be here.

Matt: A great discussion everyone, thanks for having us on today.

Nick: Tongai and Matt helped us understand the importance of measuring impact and how to do it for blue bonds. Whilst there are many challenges ahead and a huge amount to do, there are some reasons for optimism. The key takeaways for me are that measuring impact is challenging complex, and time consuming but essential. For the blue economy to really develop it's critical to have a credible and functioning blue bond market.

And thank you for listening to the angle. You can find out more information on the blue economy on our website.

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