Macroeconomic conditions create uneven capital availability across Southeast Asia, while policy gaps impede capital flow to blue economy priorities. Addressing these challenges requires not only strengthening macroeconomic fundamentals and policy frameworks but also deploying financial mechanisms that can work within – and around – existing constraints. This chapter explores these mechanisms, starting with blended finance, before moving to the range of blue finance instruments. For each instrument, the analysis explores its theoretical use case, assesses its application in Southeast Asia to date and draws on global experience to identify critical success factors and persistent barriers – including their continued reliance on development assistance.
Financing Southeast Asia's Blue Economy
Abstract
4.1.1. Blended finance can help de-risk blue economy investments by absorbing macroeconomic and project-level risks
Blended finance, defined by the OECD Development Assistance Committee as the strategic use of development finance for the mobilisation of additional finance towards sustainable development in developing countries (OECD, 2018[1]), employs various instruments to improve investment risk-return profiles. As shown in Figure 4.1, key mechanisms include guarantees that provide protection against losses; equity investments through structured funds with layered risk tranches; concessional loans and credit lines; and technical assistance to build project pipelines and enabling environments. By mitigating market failures and narrowing perceived risk gaps, these instruments lower barriers to investment. In particular, public finance absorbs risks that private investors are unable or unwilling to bear – such as political instability, currency volatility, regulatory uncertainty, or long payback periods.
Source: OECD (2025[2]), OECD DAC Blended Finance Guidance 2025, https://doi.org/10.1787/e4a13d2c-en.
For the blue economy, blended finance offers particular relevance given the dual nature of financing barriers. At the macroeconomic level, many coastal developing countries face shallow capital markets, limited fiscal capacity and broader investment climate challenges that constrain all financing flows. At the project level, blue economy investments face specific barriers: complex infrastructure (e.g. ports, harbours) requiring large capital outlays; long investment horizons with uncertain revenue streams; nascent technologies with unproven business models; and difficulty establishing clear business cases despite strong development rationales. Blended finance can address both levels. For instance, guarantees and insurance can be used to mitigate country and currency risks; technical assistance can help to strengthen the enabling environment; structuring public-private partnerships with appropriate risk allocation can make individual projects bankable.
4.1.2. Blended finance deployment in Southeast Asia shows limited scale and is concentrated across a narrow set of geographies, sectors, and instruments
Despite renewed interest in the mobilisation agenda (UN, 2025[3]), blended finance has, globally, encountered challenges in mobilising adequate and effective capital for sustainable development. OECD analysis suggests that blended finance mobilised only USD 70 billion in 2023 and that the approach remains a "cottage" industry typified by fragmented and bespoke interventions (OECD, 2025[2]). Importantly, to date, blended finance has mobilised relatively low shares of private capital in challenging contexts including least developed countries and fragile situations, and in sectors like education and social services (OECD, 2025[2]).
The systematic challenges are, to some degree, apparent in the data on private finance mobilised for the blue economy in Southeast Asia. These data consist of two main indicators: private finance mobilised for ocean-based activities and that for land-based, but ocean-relevant, activities. Henceforth, the sum of these indicators is referred to as private finance mobilised for ocean-related activities. As shown in Figure 4.2, both streams began modestly before jumping significantly after 2017, suggesting growing interest. However, even at their peak, the total private finance mobilised by official development assistance (ODA) for ocean activities and land-based ocean-relevant activities in Southeast Asia amounted to only USD 128.4 million. Importantly, both indicators exhibit volatile and episodic tendencies. Private finance mobilised for ocean-based activities, for instance, spiked in 2022, but dropped the following year. Similarly, that for land-based ocean-relevant activities peaked in 2019, but dropped off significantly by 2021.
USD millions
Source: Authors’ calculations based on OECD (2025[4]), Data Platform on Development Finance for the Sustainable Ocean Economy, https://oecd-main.shinyapps.io/ocean/.
There is also notable geographical and sectoral concentration in private finance mobilised. Private finance mobilised for ocean-based activities skews heavily towards Indonesia and Thailand – which represent nearly 70% of the total amount mobilised between 2014 and 2023. Meanwhile, the private finance mobilised for ocean-relevant land-based activities skews principally to Indonesia and the Philippines. There is also heavy concentration of ocean-related private finance mobilised in infrastructure-oriented sectors such as transport and storage, and water supply and sanitation. Sectors like fisheries attract some investment, but marine protection and conservation remain marginal. While the precise factors underlying this skew are difficult to determine, it is plausible that the concentration reflects a common pattern of blended finance – namely, that it tends to be more easily deployable in sectors and contexts with fewer barriers to private investment. For example, the strong representation of Indonesia and the Philippines may indicate a bias toward countries with more developed blue economy policy frameworks and institutional capacity.
The use of financial instruments in mobilising private finance for the blue economy in Southeast Asia remains relatively narrow, dominated by direct investments (57%), simple co-financing (27%) and syndicated loans (15%) (see Figure 4.3). The limited use of guarantees and other risk-sharing mechanisms suggests that most mobilisation relies on conventional debt and equity structures, rather than the full spectrum of available tools.
Source: Authors’ calculations based on OECD (2025[4]), Data Platform on Development Finance for the Sustainable Ocean Economy, https://oecd-main.shinyapps.io/ocean/.
4.2.1. Blue debt instruments come in different forms, with blue use-of-proceed bonds being the most prominent in Southeast Asia
Traditional debt instruments can be adapted to support the blue economy
Blue debt instruments customise traditional bonds and loans to channel capital toward ocean- and water-related priorities (World Bank, 2025[5]). They come in two main forms, use-of-proceeds or performance-based, each addressing capital flow constraints identified in Chapter 3 in different ways.
Blue use-of-proceeds instruments (often called "thematic" or labelled debt) require that net proceeds of a bond or loan are exclusively allocated to a predetermined set of eligible blue economy projects, following strict criteria for project evaluation, selection, management of proceeds and reporting. "Blue bonds" are a prime example of this. These bonds mirror green bonds but confine the eligible basket of activities to ocean- or water-related activities (e.g. sustainable aquaculture, coastal resilience, marine pollution control, marine renewable energy) in line with frameworks such as the International Capital Market Association’s Blue Bond guidance (see Figure 4.4) and the International Finance Corporation’s (IFC) Blue Finance Guidance (IFC, 2025[6]).
Source: ICMA (2023[7]), Bonds to Finance the Sustainable Blue Economy, https://www.icmagroup.org/assets/documents/Sustainable-finance/Bonds-to-Finance-the-Sustainable-Blue-Economy-a-Practitioners-Guide-September-2023.pdf.
Performance-based instruments shift the focus from how capital is spent to measurable results (outcomes). Unlike use-of-proceeds instruments, these structures focus on the actual achievement of impact. Within this category, two main structures exist:
Sustainability-linked bonds (SLB): SLBs are general-purpose debt instruments where the issuer commits to achieving predefined sustainability performance targets, measured via key performance indicators (ICMA, 2023[7]). If the issuer fails to hit those targets, financial costs rise – for example, via margin step-ups or coupon penalties – linking the cost of capital to the overall sustainability trajectory, but not to the outcomes of any ring-fenced projects. For instance, an SLB could penalise a shipping company for failing to meet fleet-wide greenhouse gas reduction target.
Outcome-based: These instruments link the repayment of principal and investor returns directly to the verified achievement of pre-agreed project outcomes, rather than the mere allocation of funds. In a blue economy context, an outcome-based bond might tie returns to the rate of marine ecosystem recovery or specific reductions in plastic pollution.
In theory, use-of-proceeds and performance-based instruments can address constraints in both the availability and flow of capital to the blue economy. On the availability side, blue bonds help tap investors seeking sustainable assets with transparent allocation, while performance-based instruments attract impact investors willing to accept outcome-linked returns in exchange for measurable environmental results. On the flow side, use-of-proceeds instruments channel capital through ring-fencing and accountability mechanisms tied to eligible activities, while performance-based instruments create ongoing incentives by linking financial terms to verified outcomes shifting monitoring responsibility to investors whose returns depend on target achievement (CGD, n.d.[8]). Blue debt instruments offer flexibility across issuers and structures. Sovereigns, sub-sovereigns, multilaterals, development banks, municipalities, and corporates (both financial and non-financial) can issue these instruments, and design choices (i.e. criteria for proceeds use or sustainability indicators) can accommodate diverse blue economy sectors.
Several early cases are emerging in Southeast Asia, paralleling the steady growth of the region's sustainable bond market
By mid-2025, the Association of Southeast Asian Nations’ (ASEAN) sustainable bond market was gaining a stronger presence within the broader Asia region. At the end of June, sustainable bonds outstanding across ASEAN+3 totalled USD 955.3 billion, representing 18.3% of the global sustainable bond market of USD 5.2 trillion, supported by robust issuance across most regional markets amid continued monetary easing. Within this total, ASEAN markets accounted for 10.5%, up from 8.3% in mid-2021. In Q2 2025, sustainable bonds made up 8.4% of total bond issuance in ASEAN countries, compared with 10.2% in the EU-20 and 4.7% globally (see Figure 4.5). While green bonds still dominate ASEAN+3's sustainable bond market, their share declined from 68.9% in June 2021 to 57.9% in June 2025 as other bond types continued to expand, led by social and transition bonds. The majority of sustainable bond issuance in ASEAN+3 comes from corporates, whereas in ASEAN itself, most issuance is from the public sector (ADB/ABO, 2025[9]).
Source: ADB/ABO (2025[9]), ASEAN+3 Sustainable Bonds Highlights, https://asianbondsonline.adb.org/newsletters/aboesg202509.pdf.
Building on this momentum, several case studies of use-of-proceeds and blue performance-based instruments have emerged in Southeast Asia. The Asian Development Bank's (ADB) blue bond issuance in 2021 provided a regional benchmark. ADB's inaugural dual-tranche deal, worth roughly USD 302 million, was issued under its Green and Blue Bond Framework to finance projects in marine ecosystem restoration, pollution control, sustainable aquaculture and marine renewable energy (ADB, 2021[10]). The issuance attracted major institutional investors such as Dai-ichi Life and Meiji Yasuda Life, with arrangers Citigroup Global Markets and Crédit Agricole. By 2025, ADB's cumulative blue bond issuance had exceeded USD 425 million, reinforcing its role as a cornerstone in building credible blue finance standards and investor confidence across Asia and the Pacific.
In the Philippines, BDO Unibank issued the country’s first blue bond in 2022 – a USD 100 million instrument dedicated to reducing marine plastic pollution – with the IFC fully subscribing and providing technical guidance on eligible project selection (IFC, 2022[11]). In Thailand, the private sector followed suit: TMBThanachart Bank issued a domestic blue bond backed by IFC (IFC, 2022[12]), while Indorama Ventures secured a USD 300 million blue loan from a consortium led by IFC and the ADB to expand their plastics recycling capacity and reduce marine plastic leakage. At the sovereign level, Indonesia broadened the market in 2023 with its first sovereign blue bond (JPY 20.7 billion), targeting investments in sustainable fisheries, coastal restoration and maritime-sector development (World Bank, 2025[5]).
Meanwhile, blue SLBs are generally nascent in Southeast Asia. For example, Thai Union Group issued a sustainability-linked bond in July 2021 for approximately THB 5 billion (around USD 155-170 million at the time). The bond is linked to performance targets related to ocean health, including enhanced monitoring and traceability of wild-caught tuna supply chains (Thai Union Group, 2021[13]). Though not specific to the blue economy, Thailand also issued a sovereign SLB in 2024 – marking the first sovereign SLB in the region (Thailand PMDO, 2025[14]). Initially targeting an issuance of THB 20 billion and ultimately increased to THB 30 billion in response to investor demand, the bond focuses on objectives such as greenhouse gas emissions reductions and clean mobility (Thailand PMDO, 2025[14]).
There are also early cases of blue outcome bonds in Southeast Asia. Indonesia is piloting a coral reef bond, with the aim of supporting marine protected areas (MPAs) (World Bank, n.d.[15]). The bond will focus on three MPAs covering approximately 1.9 million hectares, with the objective of improving coral reef health through indicators such as fish biomass, stakeholder engagement, sustainable fishing practices and the enforcement of zoning regulations. Investors will receive payments based on verified conservation outcomes, with funding sourced from the Global Environment Facility and BNP Paribas. The bond was proposed at the Third United Nations Ocean Conference and is expected to raise between USD 100 and 120 million (World Bank, n.d.[15]).
4.2.2. Debt-for-nature swaps can help ease domestic public finance constraints, but have had limited regional application
Debt-for-nature swaps serve a dual purpose of funding ocean conservation and reducing fiscal stress
Debt-for-nature swaps (DFNS) represent one of the most sophisticated instruments in blue finance, simultaneously addressing sovereign fiscal stress and ocean conservation financing gaps. First pioneered in the 1980s for terrestrial conservation, these mechanisms have been adapted for marine environments over the past decade, with the blue variant emerging as a powerful tool for ocean-dependent nations facing dual pressures of debt burden and ecosystem degradation (Fedosova and Turner, 2023[16]).
The financial architecture (see Figure 4.6) typically involves buying back a portion of a country's existing sovereign debt at a discount, then refinancing the remaining obligation at lower interest rates through a new "blue bond" issuance. Credit enhancement from development finance institutions or non-governmental organisations (NGO), usually in the form of guarantees or political risk insurance, makes this refinancing viable by improving the credit profile and reducing borrowing costs (Albinet, Chekir and Kessler, 2024[17]). The fiscal savings generated from lower debt service are then channelled into long-term marine protection activities. (Benzaken et al., 2022[18]).
Source: Nedopil, Yue and Hughes (2023[19]), “Are debt-for-nature swaps scalable: Which nature, how much debt, and who pays?”, https://doi.org/10.1007/s13280-023-01914-4.
The instrument's innovation lies in converting what appears to be a zero-sum trade-off – debt relief versus conservation spending – into a positive-sum transaction where both fiscal sustainability and environmental outcomes improve simultaneously. For heavily indebted nations facing binding constraints on domestic public finance due to debt distress, DFNS can provide immediate fiscal relief whilst maintaining market access and credit ratings – addressing the dual challenge of inadequate fiscal space and the risk of credit downgrades that would further restrict capital availability. At the same time, DFNS can help generate sustained funding for marine protection and sustainable livelihoods, addressing the chronic underfunding of ocean conservation, which typically relies on grant-based or public funds. Moreover, the long-term nature of conservation commitments (discussed below) – typically a feature of DFNS – can help strengthen the overall policy framework for ocean management, which can help attract capital from other sources.
Debt-for-nature-swaps are marginal in Southeast Asia.
No large-scale sovereign blue debt-for-nature swaps, comparable to the Caribbean and Latin American models, have been executed in Southeast Asia. However, the region has some experience with smaller-scale debt-for-nature mechanisms through the United States Tropical Forest and Coral Reef Conservation Act (TFCCA).
Indonesia represents the most significant case study for debt-for-nature mechanisms in Southeast Asia, having participated in four separate swaps with the United States totalling approximately USD 105 million since 2009. The earliest swap in 2009 redirected nearly USD 30 million of Indonesian debt over eight years toward protecting Sumatra's tropical forests – home to critically endangered Sumatran tigers, elephants, rhinos and orangutans – marking the largest TFCCA transaction at that time (US Department of Treasury, 2009[20]). Subsequent swaps in 2011 (US Department of State, 2011[21]) and 2014 (US Department of State, 2014[22]) generated an additional nearly USD 40 million for forest conservation, collectively demonstrating sustained bilateral commitment to this mechanism.
Most relevant to the blue economy, Indonesia, in 2024, signed a USD 35 million debt-for-nature swap specifically targeting coral reef conservation (US Department of Treasury, 2024[23]). Finalised in January 2025, this landmark transaction will direct funds over nine years to the Bird's Head and Lesser Sunda-Banda seascapes, two of the planet's most biodiverse reef systems within the Coral Triangle. The swap is made possible through contributions from the U.S. Government under TFCCA, with Conservation International and The Nature Conservancy providing additional support. Funds are managed through a Supervisory Committee led by Indonesia's Ministry of Maritime Affairs and Fisheries, consisting of the Ministry of Finance and participating NGOs, which will distribute grants to local organisations for coral reef protection and restoration, as well as community livelihood projects.
The broader Southeast Asian landscape for debt-for-nature swaps remains largely undeveloped beyond Indonesia's TFCCA experience. The Philippines participated in two earlier TFCCA swaps, but has had no recent activity (US Department of Treasury, 2024[23]). Thailand, Viet Nam and Malaysia, all with substantial coastal ecosystems and marine resources, have shown no engagement with debt-for-nature mechanisms. Their relatively strong credit ratings result in sovereign bonds trading near par, limiting the market-based buyback discount opportunities that characterise Caribbean swaps. Cambodia, Myanmar and Timor-Leste, together with Lao People’s Democratic Republic – currently classified by the International Monetary Fund as in debt distress – have also not yet embarked on a DFNS.
4.2.3. There is momentum for monetising blue ecosystem services, but blue carbon schemes are not ubiquitous in the region
Blue carbon mechanisms can help create new revenue streams for marine and coastal protection
Monetising blue carbon – the carbon captured and stored in coastal and marine ecosystems like mangroves, seagrasses and tidal marshes1 – represents an innovative market-based approach to environmental conservation (Locatelli et al., 2014[24]). These coastal ecosystems are exceptional carbon sinks, with mangroves storing up to four times more carbon per unit area than terrestrial forests while demonstrating remarkable resistance to natural hazards (Locatelli et al., 2014[24]). By assigning economic value to this carbon sequestration service, blue carbon initiatives create financial incentives for protecting and restoring coastal ecosystems that might otherwise be converted to other uses.
The fundamental mechanism is straightforward: scientists quantify the carbon stored in coastal ecosystems using established methods (see Table 4.1 for global estimates), and this carbon is then sold as credits that buyers can use to offset their emissions (Wylie, Sutton-Grier and Moore, 2016[25]). This approach transforms an intangible environmental benefit into a tradable commodity, effectively making coastal forests "worth more standing than cut down" (Salzman et al., 2018[26]). Blue carbon operates as a market-based form of payment for ecosystem services (PES) – a broader framework where landholders receive compensation for managing their land in ways that provide environmental benefits (Salzman et al., 2018[26]; Locatelli et al., 2014[24]). While PES programmes exist for various services like watershed protection and biodiversity conservation, blue carbon specifically targets the climate mitigation value of coastal carbon storage.
Source: Ecosystem Marketplace (2024[27]), State of the Blue Carbon Market 2024, https://www.ecosystemmarketplace.com/wp-content/uploads/2024/10/State_of_the_Blue_Carbon_Market_final.pdf.
Two primary markets facilitate blue carbon transactions. In compliance markets, governments or companies purchase credits to meet mandatory emission reduction targets under national or regional systems (Wylie, Sutton-Grier and Moore, 2016[25]) and increasingly, mechanisms established under the Paris Agreement. The voluntary market allows organisations to buy credits voluntarily to demonstrate environmental leadership or achieve corporate sustainability goals. For blue carbon projects, the voluntary market has proven more accessible, with credits verified under standards like Verra Verified Carbon Standard or American Carbon Registry (Wylie, Sutton-Grier and Moore, 2016[25]).
Blue carbon mechanisms address capital availability and flow constraints by monetising the carbon sequestration services of coastal ecosystems – mangroves, seagrasses and salt marshes – thereby transforming previously non-monetised ecosystem services into tradable assets that generate revenue. By establishing clear revenue streams tied to measurable environmental outcomes, blue carbon mechanisms can attract diverse capital sources and are a conceivable way to reduce reliance on scarce public funds for conservation.
Southeast Asia shows growing but uneven adoption of blue carbon initiatives
Southeast Asia has become a focal region for blue carbon development, driven by its extensive mangrove coverage and hence blue carbon potential (Figure 4.7), as well as concerning rates of coastal habitat loss (Miller and Taylor, 2023[28]). Yet despite growing policy interest, the translation from concept to implementation remains uneven, with progress varying across countries and projects.
Source: Bertram et al. (2021[29]), The blue carbon wealth of nations, https://doi.org/10.1038/s41558-021-01089-4.
Indonesia leads Southeast Asia in terms of blue carbon projects. Mangrove restoration initiatives across provinces including Aceh, Banten, East Kalimantan and North Sulawesi involve diverse partnerships spanning government agencies, international research institutions, local NGOs and funding organisations (Thomas, 2014[30]). Early projects targeted between 3 800 and 105 000 tonnes of CO2 equivalent annually over 20-30 year periods, with some pursuing validation under voluntary carbon standards (Thomas, 2014[30]). The country has also established a national carbon trading framework while continuing to develop institutional arrangements needed to incorporate blue carbon into carbon market mechanisms (Paledung, Amahoru and Latupeirissa, 2026[31]).
Viet Nam demonstrates an alternative pathway through its "Markets and Mangroves" project in Ca Mau province. Rather than relying on carbon credit sales, this initiative achieves carbon sequestration goals through sustainable aquaculture certification (Wylie, Sutton-Grier and Moore, 2016[25]). By certifying 1 150 shrimp farmers under international organic standards while requiring 50% mangrove cover, the project prevents deforestation and maintains carbon stocks2 (Wylie, Sutton-Grier and Moore, 2016[25]). Project developers deliberately bypassed the more complex mechanisms of the United Nations Framework Convention on Climate Change, finding that linking conservation to premium market access for organic shrimp achieved similar environmental outcomes more efficiently (Wylie, Sutton-Grier and Moore, 2016[25]). This case illustrates how blue carbon objectives can sometimes be met through creative market mechanisms beyond traditional carbon credit sales.
The Philippines has engaged with blue carbon concepts at the policy level, with national discourse evolving "from conversion to conservation to carbon" in recent decades (Song et al., 2021[32]). However, translating policy interest into functional projects has proven challenging, with research highlighting difficulties around governance co-ordination, procedural fairness and equitable benefit distribution (Thompson, Primavera and Friess, 2017[33]).
As elaborated in more detail below, substantial barriers constrain blue carbon implementation across Southeast Asia. While some projects are now operational and generating credits, many remain in planning or validation stages. Key obstacles include the absence of regulatory drivers for carbon payments, contested land tenure on communal and state-owned coastal lands, high upfront development costs, expensive measurement and verification requirements and technical challenges in quantifying soil carbon – which represents the majority of blue carbon stocks (Thomas, 2014[30]; Locatelli et al., 2014[24]). Small-scale community projects particularly struggle to achieve the economies of scale needed to cover transaction costs and compete in global carbon markets (Wylie, Sutton-Grier and Moore, 2016[25]).
4.2.4. Parametric insurance can de-risk blue economy investments but lacks regional precedents
Insurance innovations – such as through parametric triggers – can reduce the risks of investing in the blue economy
Parametric insurance provides automatic payouts based on predefined environmental triggers – wind speed thresholds, sea surface temperature anomalies, rainfall levels or earthquake magnitude (OECD, 2021[34]). When these measurable parameters reach specified thresholds, payouts trigger immediately, regardless of actual damage incurred (OECD, 2021[34]).
This differs fundamentally from traditional indemnity insurance, which requires post-event damage assessments and lengthy claims verification (Broberg, 2019[35]). Parametric insurance eliminates individual loss verification and on-site damage assessment, reducing transaction costs substantially (OECD, 2021[34]). Disbursements occur within days rather than months (Maltby et al., 2022[36]). Transparent trigger mechanisms reduce disputes between insurers and policyholders.
The relevance to blue economy finance is direct. Parametric insurance de-risks investments in climate-vulnerable coastal regions (World Bank, 2025[5]). Blue economy activities – sustainable fisheries, marine conservation, coastal tourism and aquaculture – face mounting financial risk from tropical cyclones, storm surges and extreme weather. Uninsured risks from tropical cyclones, storm surges and extreme weather constrain private capital availability – investors cannot adequately price uncertain losses, leading to capital rationing or market withdrawal from climate-vulnerable coastal regions (Kousky, Treuer and Mach, 2024[37]). Parametric insurance resolves this by using predefined triggers (e.g. wind speed thresholds, wave heights) to provide rapid and transparent payouts. This not only helps safeguard coastal livelihoods, but also makes investments bankable, enabling private capital to flow to ocean-based activities that would otherwise appear too volatile.
While evidence of uptake in Southeast Asia remains limited, parametric models have been implemented elsewhere in the blue economy space
Parametric insurance schemes with blue economy applications remain relatively under-documented in Southeast Asia. However, experiences from the Caribbean and Mesoamerican region provide valuable insights into the design and operation of such mechanisms (see Table 4.2).
The Mesoamerican Reef Insurance Programme demonstrates parametric insurance supporting marine conservation (World Bank, 2025[5]). Spanning Belize, Guatemala, Honduras and Mexico, this mechanism provides immediate financial resources for post-hurricane reef restoration. Wind speed thresholds activate payouts based on tropical cyclone model outputs, using data from independent meteorological agencies. The programme uses a "cat in nested circles" approach – payout amounts increase based on wind speed and proximity to reef sites (World Bank, 2025[5]). The Mesoamerican Reef Fund purchases the parametric policy, with AXA Climate and Munich Re providing coverage and the InsuResilience Solutions Fund covering initial premium costs (World Bank, 2025[5]). Following Hurricane Lisa in 2022, the first activation enabled swift coral reattachment, debris removal and reef stabilisation by pre-trained local NGOs and conservation organisations (World Bank, 2025[5]).
The Caribbean Catastrophe Risk Insurance Facility Segregated Portfolio Company (CCRIF SPC) represents the first multi-country parametric risk pool, formed in 2007 to provide parametric catastrophe insurance to governments across Caribbean and Central American countries. CCRIF SPC covers earthquakes, tropical cyclones and excess rainfall (Charles, 2023[38]). By 2019, CCRIF SPC made over 36 payouts to 13 member governments totalling USD 130.5 million (Charles, 2023[38]). The facility operates at the sovereign level, with governments purchasing policies to close liquidity gaps when responding to natural catastrophes (Peterson, 2020[39]).
Building on CCRIF SPC’s institutional foundation, the Caribbean Ocean and Aquaculture Sustainability Facility (COAST) applies parametric insurance to the fisheries sector (World Bank, 2025[5]). Launched in 2019 and developed by CCRIF SPC and the World Bank, COAST provides rapid financial protection to small-scale fishers and value chain actors in Grenada and Saint Lucia (World Bank, 2025[5]). Payouts trigger when modelled annual losses from rainfall and waves exceed thresholds, with CCRIF SPC transferring funds to national governments within 14 days for distribution to pre-registered beneficiaries (World Bank, 2025[5]).
Source: Authors’ based on World Bank (2025[5]), “Accelerating Blue Finance: Instruments, Case Studies, and Pathways to Scale”, https://www.worldbank.org/en/topic/environment/publication/accelerating-blue-finance-instruments-case-studies-and-pathways-to-scale.
4.3.1. Economic viability remains an underlying constraint
The viability of innovative financial instruments depends on the same factors that constrain capital availability initially – macroeconomic stability and project-level economics. Development support is therefore often needed to overcome these bottlenecks, even for instruments intended to reduce aid dependence.
Blue debt instruments and debt-for-nature swaps still require credit enhancements
Creditworthiness is an important consideration – especially for blue debt instruments. Sovereign and corporate creditworthiness fundamentally shapes investor participation and borrowing costs, meaning that bond issuances in sub-investment-grade ASEAN countries remain out of reach or prohibitively expensive. This limits the instrument's immediate applicability to the region's more creditworthy economies.
A solution to this is the strategic use of development finance. In fact, early blue bond transactions have depended heavily on development finance institutions to provide guarantees to make issuances viable for countries with weaker ratings. For example, the Seychelles' sovereign blue bond (Figure 4.8) was backed by a USD 5 million partial guarantee from the World Bank to enhance the issuance’s creditworthiness, alongside a USD 5 million concessional loan from the Global Environment Facility that further reduced net financing costs (World Bank, 2025[5]).
Source: Adapted from World Bank Group (2018[40]), Innovative Financing for Healthy Oceans, https://www.worldbank.org/en/news/infographic/2018/10/25/innovative-financing-for-healthy-oceans.
Despite their promise to alleviate fiscal stress, debt-for-nature swaps also depend on credit enhancement from development finance institutions in order to reduce borrowing costs and enable investment-grade ratings for restructured debt. The United States International Development Finance Corporation (DFC) and Inter-American Development Bank (IDB) have provided political risk insurance and partial guarantees reducing interest rates by 200-400 basis points (Albinet, Chekir and Kessler, 2024[17]). Belize combined DFC insurance with Nature Conservancy guarantees to achieve 5% interest versus 9-12% on existing distressed debt (Albinet, Chekir and Kessler, 2024[17]). Ecuador leveraged DFC and IDB enhancement despite political turmoil during negotiations (Albinet, Chekir and Kessler, 2024[17]). Credit enhancement comes with standards: DFC mandates environmental/social requirements, independent verification and debt transparency protocols. These standards mean that credit enhancement can, in addition to helping access institutional investors with minimum rating thresholds, signal credibility and create accountability.
The Belize debt-for-nature initiative combined two integrated components: the debt conversion mechanism and the conservation funding agreement (see Figure 4.9). The debt conversion mechanism involved Belize repurchasing a portion of its outstanding external commercial debt at a discounted rate, thereby reducing its total debt burden and easing long-term fiscal pressure. A special-purpose vehicle provided the upfront funding to cover the discounted debt repayment, and the arrangement included financial safeguards, such as insurance against political and natural disaster risks, as well as reserve accounts to ensure Belize could meet its obligations. This structure enabled the country to convert a portion of its debt service into funding for environmental objectives rather than traditional debt repayment.
Source: The Nature Conservancy (n.d.[41]), Case Study: Blue Bonds for Ocean Conservation, https://www.nature.org/content/dam/tnc/nature/en/documents/TNC-Belize-Debt-Conversion-Case-Study.pdf.
Parametric insurance in climate-vulnerable countries is costly, requiring risk-absorption mechanisms
Parametric insurance premiums can be prohibitively expensive for climate-vulnerable countries and communities. As a result, these schemes often rely on blended structures – combining concessional capital from development institutions with market-based insurance – to improve affordability (World Bank, 2025[5]). The Mesoamerican programme illustrates this approach. The InsuResilience Solutions Fund provided premium financing, effectively subsidising the cost of coverage and making reef insurance accessible to regional environmental trust funds (World Bank, 2025[5]).
Beyond improving affordability, development co-operation can also help overcome broader market barriers by funding early-stage research, supporting risk modelling and providing credit enhancements that reduce perceived risks for private insurers and investors (OECD, 2025[42]). By absorbing part of the upfront costs and uncertainties associated with new insurance products, concessional support can prompt private insurers and capital markets to participate in markets that might otherwise be deemed commercially unviable (World Bank, 2025[5]). As the market matures and risk models improve, the need for concessional support can decline.
The financial viability of blue carbon schemes is not assured – making alternative revenue streams necessary safety nets
Financial viability remains uncertain for many blue carbon projects, particularly those relying solely on carbon revenue. Blue carbon requires willing buyers, yet without regulatory mandates, demand remains uncertain (Thomas, 2014[30]). Project economics vary dramatically by context. In Thailand, carbon payments would need to range from USD 3.14 to USD 156 per tonne CO2 equivalent to replace income from shrimp farming – illustrating substantial variation in opportunity costs (Thomas, 2014[30]). Blue carbon projects face higher upfront costs and more expensive monitoring than terrestrial forest projects. Evidence from developing economies suggests that projects can struggle to achieve financial viability from carbon credits alone, even with optimistic price projections (Macreadie et al., 2022[43]).
This financial challenge has led some projects to bundle carbon credits with other revenue streams – sustainable fisheries, ecotourism, coastal protection payments or premium agricultural certification (Macreadie et al., 2022[43]). The Viet Nam Markets and Mangroves case demonstrates that achieving blue carbon conservation goals through alternative market mechanisms (like organic certification) may sometimes prove more practical than navigating complex carbon credit systems (Wylie, Sutton-Grier and Moore, 2016[25]). However, quantifying and verifying non-carbon co-benefits like biodiversity enhancement or fisheries productivity remains technically challenging, limiting the scalability of bundled approaches (Macreadie et al., 2022[43]).
4.3.2. System-wide capacity needs constrain implementation
The complexity of innovative instruments creates binding capacity constraints in data management, governance and fund deployment. Addressing these gaps through capacity development determines whether instruments can function as intended.
Data demands are generally high across all instruments
Robust verification and monitoring systems are essential to ensure that proceeds from debt instruments broadly – including those specific to the blue economy – achieve their intended environmental or social outcomes (OECD, 2025[42]). For use-of-proceeds blue bonds, this involves reporting on fund allocation, adherence to eligibility criteria and tracking environmental outputs such as hectares of restored mangroves or reductions in marine plastic pollution. Sustainability-linked bonds and outcome-based bonds require verification of predefined sustainability performance targets or project outcomes, as investor returns are contingent on meeting these benchmarks. Yet such verification is time‑ and expertise‑intensive: outcomes like marine ecosystem recovery may only be observable after several years and demand specialised technical skills. Countries with limited capacity therefore face significant implementation hurdles, making solutions such as third‑party verification and standardised monitoring frameworks critical to sustaining investor confidence and market credibility.
For blue carbon projects, establishing accurate baseline blue carbon inventories is a prerequisite. This is a technically intensive exercise. Quantifying carbon stocks in coastal ecosystems requires measuring both above-ground biomass and soil carbon, with soil representing the majority of blue carbon storage (Locatelli et al., 2014[24]). However, measuring soil carbon remains technically complex and expensive, requiring substantial additional scientific work compared to above-ground measurements (Wylie, Sutton-Grier and Moore, 2016[25]; Locatelli et al., 2014[24]). Many projects exclude soil carbon from their accounting due to these measurement difficulties, leaving much of the climate mitigation potential untapped (Wylie, Sutton-Grier and Moore, 2016[25]). Additional complications arise from measuring ecosystem degradation versus complete loss, accounting for climate change impacts like sea-level rise and distinguishing changes in ecosystem health from changes in spatial extent (Locatelli et al., 2014[24]).
Meanwhile, the central challenge in parametric insurance is basis risk3 – the mismatch between when payouts occur and when actual losses arise (Peterson, 2020[39]). The key is strengthening the index-loss relationship – how closely environmental triggers (like wind speed or rainfall) correlate with actual economic losses (Peterson, 2020[39]). When this relationship is precise, parametric products become more attractive because stakeholders trust that payouts will align with genuine needs. Building this precision requires substantial investment in data infrastructure and risk modelling. The Pacific Catastrophe Risk Assessment and Financing Initiative, a World Bank programme, exemplifies this approach through its development of comprehensive hazard models and risk assessment tools for Pacific Island countries (Peterson, 2020[39]). Experience, particularly from CCRIF implementation, also highlights the importance of country-specific data and local input, with models improving when local actors defined parameters for their own contexts and contributed relevant data (Peterson, 2020[39]).
Sound governance is another prerequisite for the success of blue finance instruments
Prior experiences show that conservation effectiveness in debt-for-nature swaps depends on robust governance, which ensures funds are channelled to their intended purposes over multi-decade timeframes and remain insulated from political interference. A vehicle for administering funds from the country's DFNS, the Seychelles Conservation and Climate Adaptation Trust exemplifies good practice: an independent institution with a legally protected endowment, a multi-stakeholder board, competitive grant processes and transparent reporting subject to external audit.
Marine spatial plans (MSPs) play an important role in realising the conservation benefits of DFNS. Conceptually, MSPs serve several functions in operationalising conservation objectives, such as translating high-level percentage targets into specific geographic commitments that can be monitored or creating concrete implementation roadmaps with specific timelines, enforcement provisions and so on (see Box 4.2). Previous DFNS have included MSPs as a prerequisite or co-developed commitment. Seychelles completed MSP before deploying proceeds, using a participatory process to zone its 1.4 million km² exclusive economic zone, balancing 30% no-take zones with sustainable use for fisheries, tourism and resources. Belize committed to MSP alongside the 30% protection target, recognising that spatial planning is needed to determine which areas to protect and in what sequence, given limited enforcement capacity, while minimising conflicts with fishing communities and tourism operators.
Marine spatial planning (MSP) is a comprehensive management approach designed to analyse and allocate the distribution of human activities across marine areas to achieve ecological, economic and social objectives through structured political processes. MSP serves as a critical component of integrated ocean management, working to achieve goals established through political decision-making. This planning framework creates an integrated system that accommodates both existing and emerging marine uses while minimising conflicts between different activities and protecting ecosystem integrity and essential ecosystem services. The approach recognises that ocean spaces face increasing pressure from diverse sectors including fishing, shipping, energy development, tourism and conservation, necessitating careful co-ordination to prevent degradation of marine environments.
By systematically identifying which ocean spaces are most suitable for various uses and activities, MSP balances development demands with marine ecosystem protection while pursuing social and economic goals through transparent and structured processes. The planning process typically involves multiple stakeholders – including government agencies, industry representatives, conservation organisations and local communities – working together to map current and future ocean uses, assess environmental sensitivities and develop spatial plans that reduce user conflicts. This collaborative approach helps ensure that decisions about ocean space allocation consider both immediate economic needs and long-term sustainability, creating a framework for managing increasingly crowded and contested marine environments in ways that maintain healthy ocean ecosystems for future generations.
Source: Frazão Santos et al. (2019[44]), Marine Spatial Planning, https://doi.org/10.1016/B978-0-12-805052-1.00033-4.
For blue carbon projects, secure land tenure is foundational, though challenges vary by context. Because mangroves predominantly exist on communal or state-owned land in developing countries, unclear property rights pose fundamental challenges (Locatelli et al., 2014[24]). Without secure tenure, communities and landholders may lack incentive to invest in long-term conservation, and uncertainty about who legally owns carbon rights – communities, individuals or governments – can complicate project development (Locatelli et al., 2014[24]).
Community engagement and procedural justice also emerge as critical conditions for blue carbon project sustainability. Evidence suggests that successful blue carbon initiatives tend to integrate three dimensions of justice: fair distribution of benefits, transparent decision-making processes and recognition of local knowledge and rights (Locatelli et al., 2014[24]). The Mikoko Pamoja project in Kenya exemplifies this approach. Its success appears to stem from genuine community participation through transparent processes, strong scientific foundation and, crucially, facilitation by trusted individuals who spent 20 years building relationships among community members, researchers and government agencies (Wylie, Sutton-Grier and Moore, 2016[25]).
The readiness to use generated funds from blue finance instruments is another bottleneck
In the case of blue debt instruments, a structured pipeline of bankable projects is necessary to ensure that capital raised is deployed efficiently and produces tangible outcomes. Without a pipeline, funds risk remaining idle. The Asian Development Bank's Blue Southeast Asia Finance Hub, which aimed to develop bankable blue projects worth USD 300 million by 2024 (ADB, n.d.[45]), exemplifies how development finance institutions can address pipeline constraints through technical assistance and project preparation support – catalytic functions particularly important for lower-capacity ASEAN countries (see Box 4.3) for a broader elaboration of different areas of development co-operation support for the issuance of sustainability and sustainability-linked bonds).
Green, social, sustainability and sustainability-linked (GSSS) bonds hold potential for financing sustainable development in developing countries, yet issuances remain limited. Issuers face numerous, often interrelated challenges. They can be technical – relating for example to the lack of capacity needed to structure and issue bonds, to missing pipelines of bankable projects (for use-of-proceeds bonds), or to challenges in choosing appropriate yet feasible targets (in the case of sustainability-linked instruments). They can also relate to the broader enabling environment – for example, a low level of capital market development.
The OECD “Five Is” Framework identifies five major policy areas that donors can target to comprehensively support GSSS bond issuances: investment, insurance, (market)-infrastructure, issuance and impact (Figure 4.10). Although many donors are already supporting issuances, at present they tend to act separately. Donor co-ordination across the five policy areas is therefore at the core of the Framework, and of successful scaling issuances.
Source: Adapted from OECD (2023[46]), Green, social and sustainability bonds in developing countries: the case for increased donor co-ordination, https://doi.org/10.1787/1cce4551-en.
For parametric insurance schemes, implementation capacity is key: rapid payouts are ineffective if no one is prepared to use the funds effectively. Parametric insurance's speed advantage – disbursing funds within days – only translates into real impact when implementation frameworks are established in advance (World Bank, 2025[5]). The Mesoamerican programme demonstrates this principle. Pre-trained reef response brigades – comprising local NGOs and conservation organisations – were identified, trained and equipped before any hurricane struck (World Bank, 2025[5]). When Hurricane Lisa triggered the insurance in 2022, these brigades could immediately begin coral reattachment, debris removal and reef stabilisation because they knew exactly what to do and had the necessary skills and equipment (World Bank, 2025[5]). Without this advance preparation, funds would have sat unused whilst organisations scrambled to mobilise resources and expertise. Similarly, COAST's success depends on pre-registration of beneficiaries (World Bank, 2025[5]). Fishers and value chain actors register before disasters occur, providing verified bank details and documentation. When parametric triggers activate, CCRIF SPC can transfer funds to governments within 14 days, and governments can immediately disburse to known beneficiaries (World Bank, 2025[5]). This pre-registration eliminates the chaotic post-disaster process of identifying affected parties, verifying claims and establishing payment mechanisms – steps that typically delay traditional insurance payouts by months.
4.3.3. Additionality concerns require careful scrutiny
A critical question, especially if blue finance instruments rely on development assistance, is whether they deliver genuine "additionality". Additionality manifests in two ways.
Financial additionality: mobilising capital unavailable through conventional instruments, often reflected in pricing advantages or expanded investor access
Outcome additionality: delivering outcomes that genuinely exceed what would have occurred absent the blue label
Reliable data on the additionality delivered by blue debt instruments remains limited because proving additionality requires demonstrating a counterfactual – what would have happened without the blue labelled instrument – which is inherently difficult. Evidence from blue bond yields is inconclusive in terms of financial additionality. While comparative analysis between blue and conventional bonds suggests higher yields for blue bonds, the results lack statistical significance (Erixon and Sidstedt, 2024[47]). Meanwhile, research on green bonds, the more mature predecessor, reveals that many labelled instruments simply refinance existing debt or fund already-planned projects: a comprehensive U.S. study found only 2% of green bond proceeds financed genuinely novel environmental projects (Lam and Wurgler, 2024[48]).
Similarly, the case for debt-for-nature swaps rests on demonstrating genuine additionality – that they generate conservation funding and debt relief beyond what countries could achieve independently. This requirement is highly context-dependent. In debt-distressed situations where sovereign bonds trade at significant discounts, the logic is straightforward: debt buybacks create fiscal space that would not otherwise exist. Belize's 2021 transaction exemplifies this – bonds trading below 50 cents on the dollar enabled restructuring USD 550 million (30% of gross domestic product) and achieving 12% debt reduction (Albinet, Chekir and Kessler, 2024[17]). But in non-distressed contexts where bonds trade near par, the additionality question becomes acute. Swaps cannot reduce debt stock; they can only improve debt profiles through lower interest rates or extended maturities. The case of Gabon illustrates this challenge: with bonds near par and maintained investment-grade market access, whether marginal debt profile improvements justified the swap's transaction costs remained unclear (Albinet, Chekir and Kessler, 2024[17]). Even Southeast Asia's relatively nascent experience with debt-for-nature mechanisms raises additionality concerns. Academic analysis of Indonesia's 2009 TFCCA swap questioned whether genuine additionality existed: the USD 30 million redirected represented already-obligated debt service, creating no new fiscal capacity, while evidence remained ambiguous whether conservation grants supplemented or simply substituted domestic budgets (Cassimon, Prowse and Essers, 2011[49]). Put simply, if swaps merely redirect existing financial flows rather than mobilising new resources, transaction costs become deadweight losses relative to direct grants.
Blue carbon mechanisms' credibility4 also requires demonstrating additionality – that carbon sequestration results from the project rather than business-as-usual coastal management. Experience from terrestrial PES programmes shows that paying for conservation does not automatically target areas that would otherwise be destroyed rather than rewarding ecosystems already secure (Salzman et al., 2018[26]; Alix-Garcia and Wolff, 2014[50]). The importance of blue carbon to climate action – and hence institutional structures like the Paris Agreement – also introduces complications for additionality. Whilst carbon markets nominally create tradable assets from coastal ecosystem services, countries must simultaneously meet their Nationally Determined Contributions (NDCs), which restricts the volume of credits that can be exported internationally. If a country relies on mangrove or seagrass restoration to achieve its own NDC targets, those same carbon reductions cannot credibly be sold to foreign buyers without risking double-counting (Schneider et al., 2019[51]) – the same tonne of CO₂ sequestration cannot count towards both the host country's climate commitments and that of the purchasing entity.
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← 1. In addition to these three, there are other blue carbon ecosystems, such as peatlands and microalgae forests (Ecosystem Marketplace, 2024[27]).
← 2. The 50% threshold can be met by either conservation or by planting new forests (Wylie, Sutton-Grier and Moore, 2016[25]). In the case of the latter, there is a time lag for carbon sequestration.
← 3. Basis risk manifests in two ways: payouts may trigger when no real damage occurs, or damage may occur without triggering a payout. Minimising this mismatch requires robust data collection and accurate parametric modelling (Peterson, 2020[39]).
← 4. The need for such credibility and additionality is reflected in the Core Carbon Principles of the Integrity Council for the Voluntary Carbon Market, which set a global benchmark for high‑integrity carbon credits and require that emission reductions or removals be real, additional and permanent (UNDO, 2024[52]).