After decades in the wilderness, and familiar to only those in the know, “debt-for-nature swaps” are becoming one of the hottest things in conservation finance. Last month, Ecuador struck the biggest deal of its kind: refinancing $1.6bn (£1.3bn) of its commercial debt at a discount in exchange for a consistent revenue stream for conservation around the Galápagos Islands.
Other nature-rich countries that are struggling to pay their debts have taken notice and deals are rumoured in Gabon and Sri Lanka. The market for debt-for-nature swaps is poised to exceed $800bn, according to Bloomberg, prompting fierce competition between banks as demand for green investments increases.
Debt-for-nature swaps mean reducing a developing country’s debt burden in exchange for guaranteed finance for nature. Supporters of the concept – which has its roots in the 1980s debt crisis and an idea from the late “father of biodiversity”, Thomas Lovejoy – say it is a win-win for financiers, countries and conservationists.
This week, the subject will be on the agenda at the Summit for a New Global Financing Pact in Paris, spearheaded by the French president, Emmanuel Macron, and the prime minister of Barbados, Mia Mottley. Barbados entered into its own $150m debt-for-nature deal in 2021.
“The world is facing a biodiversity, climate and debt crisis, which is even more pronounced in the developing world,” says Slav Gatchev, managing director of sustainable debt for the Nature Conservancy (TNC), which is often involved in facilitating deals.
“There is an overlap between biodiversity hotspots in the tropics and excessive levels of debt,” he says. “Typically, countries approach us because they’ve seen that these deals can be done at scale.
“You can move the needle in terms of financial pinch points, resolving liquidity constraints before they become solvency problems and, because of our role as a conservation organisation, we can be an honest broker when it comes to implementing these programmes on the ground.”
But detractors of the deals warn of greenwashing, and have criticised agreements in which banks often take large fees with comparatively small amounts going to conservation.
In a note to investors in January, Barclays questioned the green credentials of debt-for-nature swaps – often sold as ESG (environmental, social and governance) investments – because only a small fraction of the deal size ends up with conservation. This claim is strongly disputed by the banks involved.
Separately, Daniel Ortega Pacheco, a former Ecuadorian environment minister, is concerned about the potential implications of the agreements for sovereignty. Last month’s Galápagos agreement requires Ecuador to provide about $18m a year to conserve waters near the islands, mostly for a new Hermandad marine reserve that hosts whale sharks, blue whales and leatherback turtles.
“When you take a closer look at nature-for-debt swaps, Moody’s actually says they count as a default. [A deal] might prejudice developing countries in the long term and there are restrictions on how the money can be spent. Even after the second world war, Germany was free to decide where to invest,” he says.
The concerns are echoed by Katie Kedward, a UCL research fellow, who says the agreements do not go far enough. “The pandemic has brought debt restructuring back into the conversation. In terms of sovereign debt burdens, those constraints are preventing countries from investing in conservation and adaptation to the increased risks of climate change.
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“I would argue that we need to go further and look at debt forgiveness. I am hugely sceptical about how debt-for-nature swaps are being implemented in practice,” she says.
Gatchev says these concerns are unfounded, pointing to case studies by TNC of deals in Belize and Barbados, which he says show that the benefit accrues to the countries. The deals are specific to the requirements of each country and try to anticipate potential problems. The Belize agreement includes natural disaster insurance, intended to avoid the scenario where the country is forced to pay for conservation instead of rebuilding after a hurricane.
The reasons for entering the agreements bear striking parallels to the arguments of Lovejoy in 1984, when the idea was first developed.
“As debtor nations cut back on government spending, programmes for protecting natural resources are among the first to go,” Lovejoy wrote in the New York Times at the time. “Costa Rica’s superb national park system cannot be staffed or enlarged without private donations from outside the country.
“Brazil’s equivalent of the Environmental Protection Agency can do little more than pay the salaries of its employees; when fires recently broke out in its national park system, there were few guards around to fight them,” he said.
In Paris, Mia Mottley’s Bridgetown agenda will attempt to reform global finance for the environmental crises of the modern age. For some, the nature-for-debt swap is part of the answer.
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