After last year becoming the first buyer of Reef Credits, HSBC bank has teamed with the Nature Conservancy Australia to plan the world's first issuance of a nature-focused "blue bond".

The bank is contributing $1 million towards efforts by the Nature Conservancy to develop the bond issue, with the proceeds to be used to pay for nature-based restoration activities on the NSW coast.

NSW government agency TCorp, which has issued several sustainability and social impact bonds, is also poised to become involved.

The state government and mid-north coast councils are assisting with the initial groundwork, which will identify suitable projects, assess the environmental improvements they can deliver, and ascribe a financial value to them.

The project will also identify co-benefits, such as improved potential for tourism and aquaculture, protection against future losses from extreme tidal events, or a reduced need for sewage treatment plant upgrades as a result of enhanced wetland filtering of nutrients.

Entities with an interest in the improved ecosystems or co-benefits (such as a water utility looking to buy nutrient abatement) could potentially enter into offtake agreements with the project developers, and this revenue could be used to pay back investors when the bond matures.

Supporting large-scale nature-based investment

Although blue bonds have been issued in other parts of the world, these have been for infrastructure such as offshore wind, and this would be the first bond entirely focused on improving the natural environment in coastal areas.

HSBC Australia's head of sustainability, Alpa Bhattacharjee, told Footprint the project aimed to develop an investment framework that is "scalable and replicable", noting that the bond issue could be designed in several ways.

Projects in various coastal regions around Australia could potentially be aggregated once a suitable investment framework had been developed and tested, she added.

TNC oceans director Chris Gillies told Footprint the project would use the UN-backed System of Environmental Economic Accounting to help translate potential environmental improvements into benefits recognisable by the finance sector.

Both Bhattacharjee and Gillies said blue bonds could work in tandem with a proposed new ERF method for "blue carbon".

Carbon credits from blue carbon projects "are not the be all and end all", said Gillies, noting that the credits revenue stream from a typical wetland restoration project would often not be valuable enough to entirely fund it.

However, in tandem with payments from entities such as water utilities that are looking to buy nutrient abatement, arranged in conjunction with a blue bond issuance, the costs of these projects could be fully funded, he said.

Stacking different environmental units

In environmental markets, combining different tradeable units to boost the overall value of an activity is known as stacking, and Greening Australia's Dr Lynise Wearne says the concept will also have a crucial role to play in protecting the Great Barrier Reef.

Mobilising private finance to protect the Reef is essential, as the federal and Queensland governments have allocated less than a quarter of the $4 billion required to meet 2025 Reef water quality targets, Wearne told Footprint.

To help with this task, Greening Australia has been working in conjunction with environmental markets business GreenCollar on projects that create independently-verified Reef credits by reducing nutrient and sediment flows from catchment areas.

Wearne noted that HSBC, in conjunction with the Queensland government, last year purchased the first batch of Reef credits, adding that the fast-growing scheme now has about 60 projects registered to earn them.

The program is likely to expand rapidly once banana growers and other landholders see the opportunity to earn additional revenue directly from Reef credits, or indirectly by leasing out some of their land for activities that generate them, she said.

Wearne added that Greening Australia intends to apply for funding under the second round of the Queensland government's $500 million Land Restoration Fund, with the aim of demonstrating how coastal projects can be financed by stacking different environmental units.

For example, a wetland restoration project could earn Reef credits for the nutrient reduction benefits, and ERF carbon credits from the increased carbon sequestration in soils and vegetation.

The project could also be partly supported through a blue bond issuance in recognition of its other benefits, she said.