These “swaps” are monetary agreements through which a conservation organisation or authorities reduces, restructures or buys a growing nation’s debt at a reduction in change for funding in native conservation actions.
Regardless of a biodiversity “finance hole” estimated at US$700 billion per 12 months, little finance has been forthcoming from developed international locations to assist debt-distressed lower-income international locations meet their biodiversity and local weather targets.
One skilled, who helped Ecuador negotiate a debt conversion deal in 2023, tells Carbon Temporary that these swaps are “a really tangible technique that’s beginning to be confirmed”.
He provides that they’re one of many “massive sustainable financing instruments that may assist” assist global-south international locations in following by on worldwide treaties.
Nonetheless, critics are much less optimistic in regards to the feasibility of debt-for-nature swaps.
One other skilled tells Carbon Temporary that the swaps are “far too small to have any influence in any respect” on the debt of growing international locations and that they’re “not even marginal to an answer on the present degree of their dimension”.
Moreover, she says, “there’s no proof that they’ve labored for nature”.
On this Q&A, Carbon Temporary examines how debt-for-nature swaps work, the criticism they’ve acquired and whether or not they can alleviate biodiversity loss and local weather change in growing international locations.
The place did the concept of debt-for-nature swaps come from?
The thought of debt swaps emerged in response to the world debt disaster of 1982-83 introduced on by a number of shocks to the world economic system.
The 1979-80 “oil shock”, for instance, greater than doubled the true value of oil for the oil-importing growing international locations, elevating rates of interest on debt and lowering how a lot overseas change they might elevate to service their money owed.
This mushrooming disaster led to the creation of a secondary marketplace for growing nation debt in 1982, the place loans to growing international locations could possibly be traded at a market-determined value.
“
The fact is that no global-north nation has any intention of dispersing important quantities of latest grant cash… All you get is these conditional monetary devices designed to learn primarily world non-public buyers.
Frederic Hache, co-founder, EU Inexperienced Finance Observatory
This paved the best way for “swaps” of assorted varieties, the place banks may commerce their overseas debt at a reduction and scale back their monetary publicity to precarious loans, whereas non-public buyers may acquire a foothold in new markets that had been in any other case closed off to them.
In 1984, ecologist Dr Thomas Lovejoy – then a vice chairman of science at WWF – wrote a column within the New York Instances advocating for swaps the place the native forex raised would go in direction of conservation.
In contrast to earlier debt swaps pushed by a revenue motive and giving multinationals “fairness” in a rustic, debt-for-nature swaps had been supposed to learn the debtor nation. Lovejoy’s column is broadly recognised as one of many “catalysts” for debt-for-nature swaps.
Three years later, in 1987, US-based Conservation Worldwide entered into the first-ever debt-for-nature settlement with Bolivia.
In change for the Bolivian authorities’s dedication to grant most authorized safety to almost 4m hectares within the Amazon Basin, Conservation Worldwide purchased US$650,000 value of debt from a swiss financial institution for US$100,000. Bolivia additionally agreed to supply US$250,000 in native forex for administration actions within the Beni Reserve.
Even early proponents of debt-for-nature swaps acknowledged that they had been “no panacea” for environmental points within the least-developed international locations. Nonetheless, they continued to be well-liked and have seen a resurgence within the post-Covid period.
How do debt-for-nature swaps work?
In its easiest sense, a debt-for-nature swap entails:
- An indebted, biodiverse growing nation.
- A creditor or a bunch of collectors, resembling different governments or non-public bondholders.
- Worldwide conservation organisations, to purchase again the debt.
- Native conservation organisations, to implement the swap.
Worldwide conservation organisations or non-public foundations primarily based within the world north have initiated or brokered most debt-for-nature swaps.
Different actors and intermediaries concerned in swaps can embody business banks, multilateral growth banks, non-public finance establishments, insurance coverage corporations and authorized and monetary advisors.
In the present day, there are various completely different sorts of debt-for-nature offers in progress, however swaps can broadly be categorised as “non-public”, involving business debt, or “public”, involving the debt between governments.
Non-public debt swaps
In non-public debt swaps, NGOs supply to purchase again a part of a authorities’s business debt from non-public collectors at a big low cost in comparison with the debt’s face worth.
The indebted nation then commits to repaying this debt – in entire or partly and customarily in native forex. The quantity generated by this fee – the distinction between the value paid in native forex and the discounted value the NGO buys the debt for – is then put into an environmental safety fund administered by the conservation NGO.
Whereas this was the mannequin for many debt-for-nature swaps till 2008, preparations have grown extra advanced lately.
The “buy-back” of debt claims by NGOs, for example, has grown to take the type of varied sorts of bonds – basically, an IOU or mortgage issued by a authorities or firm, whereby the issuer guarantees to pay again the face worth of the mortgage on a set date, with common curiosity.
For instance, the Nature Conservancy arrange a belief fund in 2015 which issued a US$15.2m “blue bond” that personal philanthropic funds paid into. This sum was then lent to the Seychelles authorities, which used it to purchase again US$21.6m of debt from the Paris Membership of developed nation collectors.
In change, Seychelles pledged to guard 30 per cent of its marine space and 15 per cent of high-biodiversity areas, together with upgrading its marine mapping and fisheries insurance policies.
Regardless of a complete debt discount of solely US$1.4m, the island state dedicated to investing US$5.6m in marine conservation and US$3m in direction of an endowment belief fund.
Public debt swaps
Swaps of debt between international locations in change for conservation commitments are often known as “public debt-for-nature swaps”.
Right here, the indebted, biodiverse nation restructures or buys again debt from a lender nation at a lowered value. The curiosity or a proportion of the buy-back value then goes towards environmental safety.
The first such swap passed off in 1988 between Costa Rica and the Netherlands to finance a 4,000-hectare reforestation programme.
These bilateral debt-for-nature swaps have seen a resurgence prior to now 12 months or so.
In January 2023, for example, Portugal signed an settlement to swap as much as US$140m of Cape Verde’s debt for investments in a particular environmental and local weather fund, with extra debt reduction decided by how its former colony meets key local weather and nature objectives.
In September final 12 months, the US and Peru entered right into a swap settlement masking greater than US$20m of Peru’s debt to the US. The cash will go in direction of a conservation fund to guard three precedence areas within the Amazon rainforest and supply grants to native communities and NGOs.
How are swaps gaining traction in nature finance and conservation coverage?
For the reason that Nineteen Eighties, 145 debt-for-nature swaps worldwide have written off US$3.7 billion from the face worth of debt globally, based on a 2022 report by the African Improvement Financial institution (AfDB).
A lot of the debt swaps – US$2.4 billion of the overall – have occurred in Latin America and the Caribbean.
Carbon Temporary has compiled an inventory of debt swaps which have taken place around the globe. That is primarily based on knowledge from the African Improvement Financial institution report, together with reviews from governments, conservation organisations and the media. It isn’t an exhaustive record.
The map under exhibits the place swaps have taken place. The circles point out the monetary dimension of the debt concerned within the swap, whereas the colors present the last decade through which the swap was accomplished.
Debt-for-nature swap offers around the globe over 1987-2023. The scale of the circles corresponds to the face worth of debt being swapped for conservation investments by international locations, whereas the color of the circles corresponds to the last decade through which the swaps passed off. Supply: Carbon Temporary evaluation of African Improvement Financial institution (2022) and media and conservation organisations reviews (2022), WWF Middle for Conservation Finance (2003) and Eurodad (2023). Debt values not adjusted for inflation.
On the COP15 local weather summit in Copenhagen in 2009, debt-for-nature swaps featured on the UN Framework Conference on Local weather Change for the primary time. They had been included within the negotiating textual content after Indonesia launched “exterior debt swap/reduction” as a supply of finance.
At COP27 in Sharm el-Sheikh in 2022, the Sustainable Debt Coalition Initiative was established with the assist of 16 international locations. It requested for debt swaps and different mechanisms to deal with each local weather change and monetary stability considerations.
At COP28 in Dubai final 12 months, eight multilateral growth banks, together with the Inexperienced Local weather Fund and the World Setting Facility, introduced a working group to spice up the effectiveness, accessibility and scalability of sustainability-linked sovereign finance, together with debt-for-nature swaps.
Within the announcement, the event banks acknowledged that the burden of debt owed by the growing international locations “significantly hinder[s] their potential to fulfill their world local weather and nature commitments”.
The debt challenge can be being addressed in different worldwide conferences.
Through the April 2024 World Financial institution and Worldwide Financial Fund spring conferences, the Weak Twenty Group (V20) – made up of 68 closely indebted, climate-vulnerable international locations – referred to as for extra reforms to the worldwide monetary system. They proposed a number of measures, together with elevated illustration within the world monetary system and higher entry to concessional finance, or finance supplied at decrease rates of interest than business finance, together with debt-for-nature swaps.
Eva Martínez, a human rights lawyer and programme officer on the Centre for Financial and Social Rights (CEDES) in Ecuador, tells Carbon Temporary that swaps will even characteristic at this 12 months’s G20 summit in Brazil. She explains:
“There’s a working doc on the brand new monetary structure…There are [also] references to [debt swaps] for meals sovereignty, debt-for-health swaps. The spectrum is broadening.”
What are among the chief criticisms of debt-for-nature swaps?
Since their inception, debt-for-nature swaps have attracted appreciable concern over whether or not they’re efficient for both debt reduction or conservation.
As with biodiversity offsets and nature-based options, debt-for-nature swaps have been criticised for placing a value on nature and “lowering” it to a monetary commodity.
One other complication is that “biodiversity is actually low cost”, Dr Rebecca Ray from Boston College’s World Improvement Coverage Middle tells Carbon Temporary. Because of this, creating and sustaining new protected areas is commonly a small fraction of a rustic’s sovereign debt. She provides:
“This implies somewhat little bit of debt swapped goes a very lengthy approach to fund new pure protected areas, nevertheless it doesn’t go very far on the debt. And so it’s not probably the most environment friendly approach to discharge debt, regardless that international locations are notably dealing with debt stress proper now.
“Repaying debt is difficult for international locations all around the globe attributable to issues that aren’t their fault.”
These international locations want “quick debt reduction that’s quick and huge”, Ray factors out, however biodiversity conservation initiatives “are likely to price rather a lot much less cash and take much more time”.
The next sections present an summary of among the different criticisms of debt-for-nature swaps.
Conditionality, sovereignty and additionality
The earliest controversy round debt-for-nature swaps was a perceived concern of overseas interference, sovereignty and a “return to the colonial system”.
The primary swap in Bolivia in 1987, for example, “unilaterally titled” the land to be protected within the Amazon earlier than Indigenous communities may get hold of land tenure claims. In 1989, Brazil’s then-president Jose Sarney rejected debt-for-nature swaps stating: “[The] Amazon is ours… [a]fter all, it’s located in our territory.”
Coming into right into a debt-swap settlement “instantly ends in a lack of autonomy and sovereignty” over the decision of public debt, argues Mae Buenaventura, senior programme supervisor on debt and inexperienced economic system on the Asian Peoples’ Motion on Debt and Improvement (APMDD). She tells Carbon Temporary:
“Lenders decide the phrases of the swap, that means that they’ll impose situations on borrowing governments on how they need to make investments the freed-up funds and might work in direction of privileging the lender and personal firms.”
This, Mae and different critics say, provides lenders within the world north “extra management” in a growing nation than if the debt had been to be cancelled outright.
They level out that debt-for-nature swaps additionally inherently include situations connected for conservation measures and might, thus, be described as conditional debt reduction.
Others concern that swaps may open the door to “tied-aid” strategies, the place assist should be spent on companies from the lending nation, resembling swaps being coupled with carbon credit.
Nonetheless, Ray sees important evolution in governments’ and collectors’ understanding of the necessity to put conventional communities that rely on biodiversity entrance and centre within the planning course of.
She cites the success of the 2015 Seychelles debt-for-nature swap, the place the Seychelles authorities undertook a multi-year “deep session” course of to grasp threats to the livelihoods of small fishing communities dwelling on distant islands. Ray says:
“This was a means that bought neighborhood buy-in, clearly, as a result of this was defending the livelihoods of these fishing communities, but in addition recognising that conventional communities steadily don’t simply reside off of biodiversity, however they’ve to assist defend the biodiversity so as to survive.”
One other criticism of swaps is that they don’t create new, “extra” biodiversity funds from the worldwide north. Additionally they run the chance of being “double counted”, if the unique mortgage being restructured in a swap had already been counted in direction of assembly assist targets.
Frederic Hache, co-founder of the unbiased thinktank of the EU Inexperienced Finance Observatory, tells Carbon Temporary:
“The fact is that no global-north nation has any intention of dispersing important quantities of latest grant cash…All you get is these conditional monetary devices designed to learn primarily world non-public buyers.”
Scale, charges and forgiveness
The largest criticism of debt swaps from all of the consultants Carbon Temporary spoke to is their dimension relative to the looming sovereign debt of biodiversity-rich international locations.
The graphic under compares the scale of debt swaps (small, darkish blue circle) to the quantity that indebted growing international locations have paid to service their money owed (massive, gentle blue circle) over the previous three many years.
Between 1987 and 2023, low- and middle-income international locations paid greater than US$7.6tn in debt service versus US$8.4 billion handled by debt-for-nature swaps. Supply: World Financial institution Worldwide Debt Report (2023) and Eurodad calculations primarily based on the information from the World Financial institution Worldwide Debt Statistics.
The Seychelles marine biodiversity swap, for example, was thought of “one of many largest in historical past on the time”, however solely amounted to US$23m. Ray says:
“That’s pennies, compared to the billions of {dollars} that international locations like Sri Lanka are at the moment negotiating for debt restructuring…[Swaps] solely make sense as a part of a broader package deal of debt reduction to fulfill the present disaster.”
In response to Prof Jayati Ghosh, professor of economics on the College of Massachusetts at Amherst, whereas debt swaps suggest debt discount, they “are far too small to have any influence in any respect” on international locations’ debt. Typically, she says, swaps are usually not even a discount, however as a substitute permit international locations some leeway in rescheduling their debt funds. Ghosh provides:
“It’s not even rearranging the deck chairs on the Titanic. It’s pretending to rearrange the deck chairs on the Titanic, with massive creditor international locations refusing to essentially make the sorts of interventions that might make a distinction in lowering the sovereign debt whereas pretending to do one thing about local weather and conservation finance. They usually’re not.”
In response to Carbon Temporary evaluation, amongst all of the debt-for-nature swaps which have taken place, Poland’s 1992 swap allotted the best quantity of assets to nature conservation, totalling over US$500m. Ecuador’s 2023 swap, which noticed the most important quantity of debt swapped at US$1.1 billion, had the second-highest funding in conservation, allocating greater than US$400m for this function.
The chart under exhibits the 20 international locations which have been the goal of the most important debt swaps (gentle blue) and the quantity of that cash earmarked for conservation funds (darkish blue).
The highest 20 international locations that acquired the best quantity of debt forgiveness (gentle blue) and the quantity of that forgiven debt that was earmarked for conservation initiatives (darkish blue). The information covers all debt swaps carried out in every of those international locations between 1987 and 2023. Supply: Carbon Temporary evaluation. Numbers not adjusted for inflation.
Excessive transaction prices, that are pushed up by prolonged, advanced, multilateral negotiations, the variety of brokers concerned and middleman charges, additionally eat into conservation financial savings.
Others level out that different real-world challenges, resembling unstable change charges together with excessive inflation, can “erode and undermine the true worth” of a rustic’s conservation commitments. For instance, in Zambia, funds generated by a US$2.2m debt swap in 1989 had been exhausted in a 12 months “as a result of fast devaluation” of the native forex.
Human rights
Sandra Guzmán, founder and basic coordinator of the Local weather Finance Group for Latin America and the Caribbean (GFLAC), tells Carbon Temporary that it isn’t attainable to generalise the impacts of debt-for-nature swaps. She provides:
“A swap with the World Financial institution, a swap with the IDB [Inter-American Development Bank] or a swap with a business financial institution may be very completely different. Not all swaps are executed in the identical means as a result of it will depend on the establishments concerned.”
The 2007 debt-for-nature swap between Costa Rica and the US is an instance of a swap the place public data on its actions in Indigenous and native communities is obtainable.
The intention of the Costa Rica debt-for-nature swap in 2007 was to advertise the conservation, restoration and sustainable use of tropical forests outdoors protected areas in six areas throughout the nation, as proven within the map. Every color represents a area. Credit score: Asociación Costa Rica por Siempre
This swap concerned greater than 200 rural communities. One of many initiatives within the KéköLdi Indigenous territory, in south-eastern Costa Rica, helped the neighborhood reintroduce native iguanas and transmit ancestral information to youth. Guzmán tells Carbon Temporary:
“It has been stated to be one of the efficient [swaps] due to the scale of the debt lower and the conservation programme that Costa Rica promoted.”
Nonetheless, not all debt-for-nature swaps have been so clear in regards to the impacts on Indigenous and native communities.
Martínez, of CEDES Ecuador, tells Carbon Temporary that the Galapagos debt-for-nature swap – signed final 12 months to cancel US$1.1 billion of Ecuador’s debt in change for investing US$450m to guard Galapagos islands – didn’t bear a session course of with Indigenous peoples and native communities. This might influence the financial, social, cultural and environmental rights of those communities, Martínez stated.
The Local weather Bonds Initiative revealed a report in 2023 analysing debt-for-nature swaps within the Seychelles, Belize, Barbados and Ecuador.
Daniel Costa, senior sustainability debt analyst at Local weather Bonds Initiative, tells Carbon Temporary that a lot of the analysed swaps don’t point out how they contain native communities. He provides:
“That is what we wish to see additional as these transactions are developed.”
Governance
Different criticisms of debt-for-nature swaps are the insufficient governance situations that debtor international locations could have. Governance refers to how swaps are applied within the international locations, the establishments and stakeholders concerned and the construction of negotiations.
For instance, the 2023 Galapagos swap had “severe limitations” in monitoring and enforcement, lack of transparency and accountability and “little readability on potential fiscal dangers for Ecuador”, based on latest evaluation by the Latin American Community for Financial and Social Justice (Latindadd) and different organisations.
The evaluation additionally revealed an absence of public data on the conservation fund and whether or not these actions have contributed to capacity-building on the native degree.
The choice on which conservation actions shall be applied with a debt-for-nature swap varies from transaction to transaction, notes Costa, of Local weather Bonds Initiative. These actions are sometimes managed by funds, whose members embody conservation organisations along with the federal government, he provides.
Carola Mejía, local weather justice, transitions and Amazon coordinator at Latindadd, tells Carbon Temporary that whereas swaps could also be doubtlessly scalable, they should be improved in some ways. She says swaps should be constructed on rules resembling transparency, respect for sovereignty and equity in negotiation.
Guzmán, of GFLAC, tells Carbon Temporary:
“Not all international locations can have the identical capacities by way of governance, buildings, human, monetary and institutional capacities. There are severely indebted international locations that want [debt] cancellation; there are international locations that may do swaps as a result of they’ve economies that may transfer in direction of these eventualities; and there are international locations with higher monetary capability that will not [need] swaps, however different forms of financing.”
Greenwashing
Civil society organisations and researchers have additionally raised considerations in regards to the potential for “greenwashing” in some debt-for-nature swaps.
Mejía says international locations within the world north are usually not assembly their local weather finance and biodiversity commitments, however are selling swaps as “the massive resolution”. This carries the chance of greenwashing, Mejía provides, as relatively than creating optimistic motion for the setting, swaps are producing extra loans and debt.
For instance, the US$30m swap between Indonesia and the US made in 2009 in change for conserving rainforests on the island of Sumatra had a number of shortcomings, based on a 2011 examine. The swap didn’t release extra assets for the Indonesian authorities and was “too insignificant to create oblique (optimistic) financial results”, the examine says.
Within the 2023 Galapagos swap, though the IDB supplied an US$85m assure to assist the debt settlement for 18.5 years, the Latindadd report discovered that “there have been no extra worldwide commitments or disbursements up to now”.
Debt-for-nature swaps have additionally been questioned for not immediately benefiting residents and for transferring energy over the administration of the funds and the implementation of conservation initiatives to collectors.
The Gabon Blue Conservation was created as a part of the swap the place Gabon acquired US$500m in change for safeguarding 30 per cent of its oceans. This foreign-owned conservation organisation receives a 20 per cent administration charge, which “instantly reduces the financial savings for the nation by a [fifth]”, a report by the Coalition for Truthful Fisheries Preparations says.
Furthermore, the report provides, “it’s onerous to see proof that” the marine spatial plan, mandated by the Nature Conservancy for this swap, empowers marginalised teams, together with fishers, for decision-making round coastal administration.
Hache tells Carbon Temporary:
“From a geopolitical perspective, swaps are nice. It’s a approach to acquire entry and management to land assets that may show presumably treasured sooner or later. That is…diplomacy by different means.”
Can debt-for-nature swaps be simpler?
Debt-for-nature swaps are being reviewed for his or her effectiveness once more at a time when biodiverse, growing international locations battling debt funds are having to seek out the monetary assets to fulfill biodiversity and local weather targets.
In response to the newest World Financial institution debt report, low- and middle-income international locations owed their overseas lenders US$9tn in 2022. The identical 12 months, these international locations paid a document US$443.5 billion to pay down these money owed, with these funds diverting authorities spending away from crucial growth priorities, in addition to local weather and nature spending.
A 2023 examine discovered that 67 international locations susceptible to defaulting on their loans collectively host 22 per cent of worldwide “biodiversity precedence areas”, resembling comparatively intact however susceptible forests, grasslands, deserts and mangroves. For 35 of those international locations, it estimated that each one of their unprotected biodiversity precedence areas could possibly be protected for a fraction of their nationwide debt.
Debt-for-nature swaps and debt-for-climate swaps may release greater than US$100 billion of debt in growing international locations, based on a latest evaluation by the Worldwide Institute for Setting and Improvement (IIED).
Ray, from Boston College, says that swaps may help create house for international locations to make climate-adaptation plans that additionally assist protect livelihoods that rely on biodiversity, resembling fishing or amassing forest produce.
She provides that this may “interrupt a vicious cycle between pure capital and unstable monetary capital”, the place financial crises and excessive climate occasions drastically scale back local weather adaptation and biodiversity budgets.
However, so as to create this respiration room for biodiversity, swaps want to perform a number of issues, she tells Carbon Temporary:
“You want a variety of time. You want political capital and institutional capability to centre the communities who’ve historically been the stewards of biodiversity and discover a approach to guarantee that not solely is their entry to biodiversity uninterrupted, however that they’re accountable for that job and rewarded for it. And an actual dedication to accountability from everybody concerned to ensure these initiatives really assist assist biodiversity and communities.”
Ray factors to the case of “blue bonds” for marine conservation, a label that multinational financial institution Barclays referred to as “deceptive” in 2023. In response to Barclays, whereas “the purpose of a inexperienced bond is that 100 per cent of the proceeds raised are spent on” marine initiatives, in blue bonds floated, every further occasion “takes a lower from the proceeds”.
Different consultants Carbon Temporary spoke to had differing views, suggesting that debt-for-nature swaps wouldn’t simply require enhancements in governance, however in reforming the structure of worldwide finance.
Guzmán says:
“[Swaps] are initially going to open up your fiscal house, however are usually not going to unravel the financing downside for international locations. What we have to basically change is the operation of monetary establishments and the kind of loans and the situations they offer for these loans, i.e., decrease rates of interest and rather more acceptable remedy. That’s actually what will assist sustainable financing.”
To Ghosh, collectors are sometimes “unwilling to make very massive commitments of debt discount”. She provides:
“You must do one thing about sovereign debt by itself, which implies you must be severe in regards to the debt reductions. That’s unbiased of whether or not you’re linking this conditionality with nature, as a result of with out coping with the sovereign debt, you aren’t going to generate a inexperienced transition in any of those international locations. They merely can’t afford it.”
Ghosh suggests options that would change the “panorama of debt”, together with a standstill on debt throughout debt negotiations – the place the quantity of debt stays the identical as a substitute of accruing curiosity whereas events come to a decision – and involving all collectors: non-public, public and multilateral.
To Hache, the “satan lies within the particulars” of debt-for-nature swaps. He says:
“It’s in regards to the proportion of the funds allotted to conservation. It’s about the true quantity of debt forgiveness in comparison with the place the debt was buying and selling, in comparison with its nominal worth earlier…In the end, you even have to check it to the true various, which is debt forgiveness, and also you kill any possibilities of debt forgiveness, loss and damages by endorsing or accepting these offers.”
This story was revealed with permission from Carbon Temporary.
