The Debt-for-Nature Lifeline

By JOHN ANTONIO BRICE?O and JENNIFER MORRIS

This article first appeared on Jun 20, 2023: The Debt-for-Nature Lifeline by John Antonio Brice?o & Jennifer Morris - Project Syndicate (project-syndicate.org)

Debt-for-nature swaps are no longer just a viable economic option; they are now a lifeline for our planet.

But if we do not reach for that lifeline now by pursuing crucial reforms and making credible commitments, it may soon be beyond our grasp.

French President?Emmanuel Macron’s?Summit for a New Global Financing Pact, to be held in Paris this week, is a historic opportunity to deliver deep financial reforms that support development and bolster the fight against climate change. But the summit’s focus – climate, development, and debt – appears to be missing something: nature.

Unprecedented biodiversity loss and environmental degradation pose an existential risk to all life on Earth, owing to the depletion of natural resources (including water), disruptions to soil formation and thus food production, longer recovery times from natural disasters, and, potentially, climate and resource conflicts. According to the World Economic Forum, the climate and the environment account for six of the?top ten?global risks in the decade ahead.

Developing countries did not generate these risks, but they are?paying the price: they must fund interventions to help mitigate the climate and biodiversity crises, while also paying to address the loss and damage associated with these interwoven crises.

Yet these countries are already stretched to their fiscal limits, not least because advanced-economy interest-rate hikes and risk-repricing have?driven up debt-servicing costs. As a result, they often lack access to affordable finance.

Efforts to address this systemic problem are underway. A notable example is Barbadian Prime Minister?Mia Amor Mottley’s?Bridgetown Initiative, which aims to create more fiscal space for development, climate mitigation and adaptation, and loss and damage. But more must be done. In fact, the global financial system must be entirely reimagined.

Most immediately, the upcoming summit in Paris must produce a credible reform plan that aligns with the needs of nature. At the same time, multilateral development banks must place nature at the center of their operations. The?Global Biodiversity Framework?agreed at last December’s United Nations Biodiversity Conference in Montreal, requires them to ensure that their portfolios are both nature-positive and aligned with the 2015 Paris climate agreement.

Special attention should be paid to scaling up proven solutions, such as debt-for-nature swaps. Such swaps – in particular, the “blue bonds” pioneered by The Nature Conservancy – enable a country to refinance its debt under more favorable terms, and allocate the proceeds toward biodiversity protection and climate adaptation. The result is higher spending on conservation or green investment, and a smaller – or, at least, not a larger – debt burden.

In 2021, a $364 million?debt-conversion deal?with The Nature Conservancy enabled Belize to reduce its debt by about 12% of GDP, while unlocking an estimated $180 million in long-term sustainable conservation funding over 20 years. The agreement also included a commitment from Belize to protect 30% of its maritime territory.

Last year, a similar?agreement?– involving The Nature Conservancy and the Inter-American Development Bank – enabled the Barbadian government to convert $150 million worth of debt, again in exchange for a commitment to conserve approximately 30% of its maritime territory. And under the world’s largest?debt-for-nature deal, reached last month, Ecuador is converting $1.6 billion in debt into $12 million per year for the conservation of the Galapagos Islands.

Debt-for-nature swaps are no panacea; they do not eliminate the need for grants, concessionary financing and other loans, or private investment. Donor pledges still must be fulfilled: rich countries have yet to meet their 2009?commitment?to deliver $100 billion per year in climate finance to developing countries by 2020.

Rich countries have also failed to mobilize adequate private investment. Scaling up credit enhancement, for example through third-party guarantees, would lower the investment risk (and thus debt issuers’ borrowing costs), which would simultaneously enable countries to reduce their debt burdens and help to crowd in private financing for climate and nature investments.

Nonetheless, debt-for-nature swaps can go a long way toward helping low- and middle-income countries address the triple challenge of high debts, climate change, and biodiversity loss. Recognizing this, both the?Sustainable Debt Coalition, which was created and endorsed by African finance ministers at last year’s UN Climate Change Conference (COP27), and the V20 group of climate-vulnerable countries have?called for?greater use of these and other innovative tools.

The good news is that the institutional architecture needed to pursue debt-for-nature swaps at scale and with more actors is already largely in place. What is needed now is shareholder will and executive action to boost development-finance institutions’ capacity to provide guarantees for sovereign-debt issuance linked to climate and nature investments.

The Paris summit can kick-start progress by aligning international financial institutions on mechanisms to guarantee debt conversions, and by presenting a package of reforms aimed at increasing such conversions’ effectiveness and efficiency before the UN Climate Change Conference (COP28), which begins on November 30. Financial reforms that do not account for nature will prove unsustainable in the long run.

Debt-for-nature swaps are no longer just a viable economic option; they are now a lifeline for our planet. But if we do not reach for that lifeline now, it may soon be beyond our grasp.