With sovereign debt-for-nature swaps picking up again after a meagre year and even moving into new formats and public benefits, a new “coalition” of environmental NGOs has estimated the instrument’s potential could be as high as US$100bn.
“Scaling sovereign debt conversions ... has the potential to unlock up to US$100bn in climate and nature finance,” according to a statement by the six-strong group, which is led by The Nature Conservancy, a US NGO that has driven the majority of completed debt-for-nature deals.
TNC has also led efforts this year to standardise DFN practice – a key focus for the new coalition, whose other founders are Conservation International, The Pew Charitable Trusts, Re:wild, the Wildlife Conservation Society and World Wildlife Fund in the US. Other global, regional or national NGOs may join later too.
A US family office, ZOMA Foundation, provided “philanthropic support” to establish the group.
Pew was the key NGO behind Ecuador’s US$1.6bn DFN last year, while Conservation International led what is often treated as the original DFN deal – with Bolivia in 1987.
The modern DFN era is usually considered to have begun with TNC's transaction with the Seychelles in 2016 and has since seen deals for Barbados, Belize, Ecuador, El Salvador and Gabon, with others underway for the Bahamas and the Maldives, as well as a second Barbados swap transaction.
The group’s potential estimate draws on the World Bank’s International Debt Report, as well as pricing of outstanding emerging market sovereign Eurobonds and the volume of conservation funding released by past sovereign debt conversions.
It also echoes a call by a prominent development thinktank for a massive scaling-up of DFN. Earlier this year, the International Institute for Environment and Development said this could free up as much as US$100bn for climate action in emerging markets.
IIED said that deals, including with sovereign creditors, could release as much as US$33.7bn for the least developed countries, compared with their combined US$6.1bn of climate finance in 2021.
Common standards
The coalition – which has no formal name but operates the www.debtfornature.org website – aims to expand DFN through common standards and a shared pipeline, as well as by broadening the instrument’s geographical scope beyond its Latin America and Caribbean focus.
Its first step looks set to be an initial draft of a “living document” of common standards to be released in the first quarter for “high ambition” transactions and wider project features like independent conservation trust funds, said Slav Gatchev, managing director, sustainable debt at TNC.
“The standards are not meant to be a straitjacket. They're meant to be flexible and high level enough to allow for innovation and customisation to future-proof them as much as possible and [be] more of a practitioner's guidebook," he said.
Some DFN players questioned the group’s conservation focus, especially with swaps starting to incorporate broader environmental and social use of proceeds.
“Much depends on whose interests these standards are supposed to be safeguarding, and also their scope. Critically, [they] cannot simply focus on the environmental outcomes and parameters which are the focus of the NGOs, but should also take into account economic efficiency and the financial interests of the host government,” said one.
Gatchev said the coalition has also collaborated on standards with non-NGOs. These include the US International Development Finance Corporation and the Inter-American Development Bank – the original DFI/MDB providers of DFN credit enhancement and co-chairs of the Task Force on Credit Enhancements for Sustainability-Linked Sovereign Financing formed at last year’s COP28 UN climate conference in Dubai.
Other collaborators are investors Legal & General Investment Management – the biggest buyer of DFN bonds – and Nuveen, as well as law firm A&O Shearman, investment banks and the Climate Bonds Initiative.
One notable feature of the coalition is its ambition for joint projects. Not all conversions will be joint projects, however – and not only because the area’s very long lead times mean that some members, like TNC, are close to launching deals such as Barbados’ second transaction that predate the coalition.
“This will happen organically where it makes sense,” said Gatchev, citing scenarios such as when two NGOs work in the same geography or one has complementary expertise to another “with boots on the ground”.
The first joint deal could close next year, he said.
Wish list
At a launch event, coalition members articulated a raft of ambitions for deals – including a call by Patrica Zurita, chief strategy officer at Conservation International, for a pan-Amazonia debt conversion involving eight of the region’s sovereigns.
Other items on the coalition’s wish list include an unprecedented US$5bn transaction proposed by Matt Rand, senior director at Pew. He also anticipated “a swap that looks at the whole country ecosystem, from mountain top to the far offshore” and deals involving not only multiple coalition members but a local NGO too.
With the European Investment Bank and UN Green Climate Fund having become involved through the new Barbados deal and CAF Development Bank in the recent El Salvador swap, several NGOs also called for more DFIs to enter the area.