The Andaman and Nicobar Islands can become a model for sustainable growth by leveraging their strategic location, harnessing clean energy, protecting biodiversity, and financing development through blue bonds.
The Andaman and Nicobar Islands act as gateways into Southeast Asian countries. The strait facilitates the movement of over 90,000 vessels per annum, constituting about 30 percent of global trade — and this is only set to grow. The smallest radial distance between ports in the Andaman and Nicobar Islands and ports in the Southeast Asian region is about 50 km. This gives India an edge in establishing formidable trade relations with these countries. Creating and augmenting world-class supply chain infrastructure can put these islands and the country on a path to prosperity, provided clean energy is adopted while biodiversity is protected.
The Andaman and Nicobar Islands receive abundant sunlight due to their location in the equatorial zone. This bodes well for generating distributed solar micro-grids across the islands. Additionally, due to the absence of any significant high-altitude landforms that could have otherwise obstructed the flow of sea winds in the region, near-shore and offshore wind energy parks are another potential source of clean energy.
Nature-based solutions (NBS) harness biodiversity and natural processes to tackle societal challenges such as climate change, disaster risk reduction, and food security.
The Islands are recognised as a biodiversity hotspot, home to a rich array of unique flora and fauna, including numerous endemic species. However, the region is increasingly threatened by deforestation, climate change, and seismic events, all of which contribute to soil erosion and a decline in biodiversity. Nature-based solutions (NBS) harness biodiversity and natural processes to tackle societal challenges such as climate change, disaster risk reduction, and food security. They offer co-benefits for both human well-being and the environment. NBS include actions like conserving, sustainably managing, and restoring ecosystems, which can make land masses resilient and attract tourism-related revenues to the islands.
All these new projects need substantial capital mobilisation. Financial instruments such as blue bonds and green bonds can be used to mobilise private capital to finance such environmentally friendly projects. Marine-based renewable energy projects such as offshore wind, ocean thermal energy conversion, tidal power, and mangrove restoration are eligible for blue bond issuance. Meanwhile, inland green energy and NBS projects can be financed through green bonds. It is worth noting that clean energy projects are commercially viable, and corporations can utilise green or blue bonds to raise capital with or without government support. However, NBS projects may not always be fully commercially viable. In such cases, the Government of India (GOI) should underwrite these green or blue bonds to cover potential defaults.
Over time, green bonds have been fairly standardised through recognised principles and standards. However, blue bonds are relatively novel. Hence, markets are still developing globally accepted frameworks for identifying the eligibility and creditworthiness of ‘blue’ projects. This lack of certainty raises concerns regarding investor returns and fund utilisation. Presently, there is only a small database of blue economy projects. Moreover, their scale is typically small, with complex and long-term return profiles.
Over time, green bonds have been fairly standardised through recognised principles and standards. However, blue bonds are relatively novel. Hence, markets are still developing globally accepted frameworks for identifying the eligibility and creditworthiness of ‘blue’ projects.
Despite the advancement of several remote sensing and on-ground detection systems, measuring blue-projects' precise environmental and socio-economic outcomes is an evolving topic. This has raised concerns about “blue washing”, dampening investor interest. For example, blue bond issuers may claim that environmental benefits are more impactful than they actually are, while failing to report unforeseen negative impacts.
To bolster blue bonds, a high credit rating and wider investor interest can be secured by allocating a fraction of proceeds from conventional, non-environmental projects in the region toward debt servicing. This will align with the ‘polluter pays’ principle while expanding the footprint of green assets across the islands. Besides, the central government can offer credit guarantees for blue bonds to reassure investors. In addition, blended finance models that combine public funds (for example, grants and concessional loans) and private capital are another way to improve the credit profile of these bond issuers. Public capital can also be used to cover transaction costs, including the cost of certification and monitoring.
Using cutting-edge technologies like AI, ML, and blockchain to monitor the progress and impact of blue-bond-financed projects can mitigate the risks of “blue bond washing”. The use-of-proceeds bond framework is the best way to mitigate this risk, as capital can be deployed in pre-defined projects in the bond covenant. The covenant can be structured to impose penalties on the issuer if instances of “blue bond washing” occur, ensuring that proceeds are genuinely allocated to ocean-related sustainability projects.
Using cutting-edge technologies like AI, ML, and blockchain to monitor the progress and impact of blue-bond-financed projects can mitigate the risks of “blue bond washing”.
The United Nations recommends three key steps essential for the success of blue bonds and to prevent “blue bond washing”. First, blue bond standards must be aligned with existing global standards. Second, there is a need to develop a framework that establishes a ‘blue baseline’ with periodic disclosures of sustainability performance metrics that are measurable and auditable. The final step is the engagement of a second-party opinion maker to verify the framework, eligibility, and disclosure practices of the project. Such a report would lend credibility to the issuance of blue bonds.
The above initiatives can gain real momentum only if the government assumes the role of an active participant in this endeavour. Government agencies must express their firm commitment to such development opportunities by having their skin in the game regarding financial investments, albeit with a minority stake. This will reduce the real and perceived risks for private sector investors when investing in remote geographies. The participation of the government as an investor can improve the credit profile of these projects, resulting in higher subscriptions to blue bonds.
The Logistics Ease Across Different States (LEADS) 2024 report, unveiled by the GOI, categorises the Andaman and Nicobar Islands under the ‘aspirer’ category. The above interventions, powered by blue bonds, can potentially catapult them into the ‘pioneer’ category. Financing clean energy deployment, like offshore wind farms, while ensuring marine ecosystem conservation and restoration through the issuance of blue bonds, can become a model worth emulating across other Indian states.
Labanya Prakash Jena is a visiting senior fellow at the London School of Economics and Political Science (LSE) and Director at the Climate and Sustainability Initiative (CSI).
Prasad Ashok Thakur is an alumnus of IIT Bombay and IIM Ahmedabad.
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Labanya Prakash Jena is Director at the Climate and Sustainability Initiative (CSI) and a visiting senior fellow at the London School of Economics and Political ...
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Prasad Ashok Thakur is a CIMO scholar and has authored a book and several articles published with The World Bank Asian Development Bank Institute United ...
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