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Rising debt levels and the ravages wrought by climate change present acute threats to achieving sustainable development goals in emerging market and developing economies (EMDEs). The external debt stock of developing countries surpassed $10 trillion in 2020. Almost 60 percent of the world’s poorest countries are either in or at high risk of debt distress. Soaring debt undermines governments’ ability to respond to external shocks such as climate disasters, the toll of which has been mounting: from the devastating 2022 floods that tormented Pakistan to six successive failed rainy seasons in the Horn of Africa.
Policymakers globally are discussing possible mechanisms to address fiscal and climatic challenges in EMDEs simultaneously. Debt-for-climate swaps—also referred to as debt-for-nature swaps—are one such arrangement, in which creditors provide debt relief and, in exchange, sovereigns commit to specific conservation efforts. The intuition behind such complex deals is that, by freeing up fiscal space for environmental protection and so-called nature-based solutions in EMDEs, some of the climate-related challenges faced by capital-scarce countries can be confronted in coordination with those possessing ample capital. This proposition is particularly attractive if it can help unlock new and additional funding for climate adaptation projects, which typically do not generate attractive financial returns but are nonetheless a priority for most EMDEs, including many African states.
Debt-for-climate swaps can be classified into two broad types: “bilateral” or “multilateral” debt swaps, which are negotiated directly with one or more official creditors, and “tripartite” debt swaps, in which a sovereign buys back its bonds from private investors to retire them with the help of a loan from a third party. These swaps have three important elements. First, either all or part of the existing debt is repurchased at a discount using a loan. Second, new bonds are issued at an interest rate below the market rate for the country with the support of a guarantee from a highly rated institution, thus providing fiscal savings. And third, the sovereign commits to use part of the savings toward conservation activities typically targeted to climate adaptation and biodiversity preservation.
After the first debt-for-climate swap was executed by Bolivia in 1987, more than 100 similar transactions were engineered during the 1980s and 1990s, but numbers peaked in 1993 and were followed by a sharp decline. A recent revival has taken place, with several sovereigns successfully executing such swaps: Seychelles in 2015 (blue bond issued in 2018), Belize in 2021, Barbados in 2022, and Ecuador and Gabon in 2023.
While the number of deals annually does not compare with the early 1990s, the recent batch of executed swaps makes up for the lower number by the size of debt covered. Indeed, Ecuador’s debt swap of $1.6 billion has spurred considerable interest in the instrument: more than 50 developing countries are presently either in debt distress or at high risk of an imminent debt crisis, many of which—including Cabo Verde, Eswatini, Gambia, Kenya, Pakistan, and Sri Lanka—are contemplating debt-for-climate swaps to achieve debt relief and create fiscal space.
In this commentary, the authors find that intrinsic features and the experience so far of debt-for-climate swaps suggest they could become a valuable tool—even if they are no silver bullet and may need to be complemented by additional instruments—to address fiscal and environmental problems. These swaps offer a realistic option to help, for example, vulnerable small island developing states (SIDS) respond to specific challenges and can become an innovative mechanism to channel additional capital to certain EMDEs while anchoring climate commitments.
To better understand the scalability and applicability of debt-for-climate swaps, it is worthwhile to derive lessons from recent deals (see Appendix for details). Key aspects of these transactions are:
Following the completion of the debt-for-climate swap by Seychelles in 2018, the Nature Conservancy—which played a pivotal role in this deal and others that followed—estimated that a similar model could apply to up to 85 countries. The mere handful of deals completed since then underlines their complexity and the challenges faced in executing them.
A seminal International Monetary Fund paper argues that debt-for-climate swaps are superior to alternatives only in narrow settings: they are better than conditional grants only if they are structured in a way that makes climate commitments senior to debt service, and they surpass comprehensive debt restructuring only if they lower debt risks without economic disruptions.
Several barriers may impede the successful execution of a debt-for-climate swap:
Despite the challenges, interest in debt-for-climate swaps is growing, as mentioned earlier, raising the question of under what circumstances and for what types of sovereigns and debt profiles they could be most applicable. Elements for consideration could include:
Debt-for-climate swaps will not solve the widening crisis of indebtedness facing EMDEs, nor are they game-changers for the difficulties these countries face in attracting appropriate financing for climate mitigation and adaptation projects. That said, as this commentary has argued, under the right conditions debt-for-climate swaps can help particular subcategories of vulnerable states find new financing for environmental priorities while protecting livelihoods and improving a country’s fiscal outlook. It is no coincidence that climate-vulnerable and heavily indebted SIDS—such as Barbados and Seychelles—have been among the keenest adopters of the mechanism, as it provides these states with hitherto unavailable resources for adaptation projects that focus on combating oceanic biodiversity loss and supporting the livelihoods of coastal communities. Similar spending priorities associated with swap commitments have been on evidence in Belize, Ecuador, and Gabon, where the focus has been on the blue economy and marine conservation projects—the latter pose considerably fewer governance challenges than, for example, limiting deforestation in the world’s rainforests in terms of monitoring compliance with the swap’s conservation goals. Debt-for-climate swaps have thus been quite effective in directing funds toward climate adaptation projects.
Moreover, debt-for-climate swaps—as opposed to straightforward debt restructuring, for example—have an important signaling function for sovereigns to underline their commitment to both environmental and fiscal goals. As such, they can also be valuable for building institutionalized partnerships and ensuring accountability vis-à-vis investors, international organizations, and domestic populations.
 United Nations Conference on Trade and Development, “UNCTAD Measures Progress on Sustainable Development Goals, Shows Impact of Global Crises,” June 27, 2023, https://unctad.org/news/unctad-measures-progress-sustainable-development-goals-shows-impact-global-crises; World Health Organization, “UN Report: Global Hunger Numbers Rose to as Many as 828 million in 2021,” July 6, 2022, https://www.who.int/news/item/06-07-2022-un-report–global-hunger-numbers-rose-to-as-many-as-828-million-in-2021.
 Brahima S. Coulibaly and Wafa Abedin, “Addressing the Looming Sovereign Debt Crisis in the Developing World: It Is Time to Consider a ‘Brady Plan,’” Brookings Institution, April 2023, https://www.brookings.edu/articles/addressing-the-looming-sovereign-debt-crisis-in-the-developing-world-it-is-time-to-consider-a-brady-plan/.
 UNHCR, “As the Horn of Africa Drought Enters a Sixth Failed Rainy Season, UNHCR Calls for Urgent Assistance,” February 28, 2023, https://www.unhcr.org/news/horn-africa-drought-enters-sixth-failed-rainy-season-unhcr-calls-urgent-assistance.
 Gautam Jain, Luisa Palacios, and Harry Verhoeven, “The Intersection of Debt and Climate in Emerging Market and Developing Economies: Roundtable Report,” Center on Global Energy Policy, Columbia University, July 18, 2023, https://www.energypolicy.columbia.edu/publications/the-intersection-of-debt-and-climate-in-emerging-market-and-developing-economies-roundtable-report/.
 There is a slight distinction between debt-for-climate swaps and debt-for-nature swaps in that the former arrangement aids climate action while the latter protects nature. However, since most swaps direct fiscal resources toward both activities, the terms are used interchangeably.
 Kristalina Georgieva, Marcos Chamon, and Vimal Thakoor, “Swapping Debt for Climate or Nature Pledges Can Help Fund Resilience,” IMF Blog, December 14, 2022, https://www.imf.org/en/Blogs/Articles/2022/12/14/swapping-debt-for-climate-or-nature-pledges-can-help-fund-resilience.
 Nicole Kearse, “A Case for ‘Debt-for-Nature’ and ‘Debt-for-Climate’ Swaps in Emerging and Developing Economies,” Butterworths Journal of International Banking and Financial Law X (January 2023): 28–29, https://www.linkedin.com/posts/nicolekearse_a-case-for-debt-for-nature-and-debt-for-climate-activity-7065274233999757312-AFD-/.
 Harry Verhoeven, “Africa’s Call for Climate Change Adaption: Heeding Warnings from the IPCC Report in Advance of COP26,” Center on Global Energy Policy, Columbia University, September 14, 2021, https://www.energypolicy.columbia.edu/publications/africa-s-call-climate-change-adaption-heeding-warnings-ipcc-report-advance-cop26-qa-dr-harry/.
 Matthew R. Claeson, “Debt-for-Nature Swaps: A Concise Guide for Investors,” Lord Abbett, December 19, 2022, https://www.lordabbett.com/en-ie/financial-intermediaries/insights/investment-objectives/debt-for-nature-swaps–a-concise-guide-for-investors.html.
 African Development Bank Group, “Debt-for-Nature Swaps: Feasibility and Policy Significance in Africa’s Natural Resources Sector,” October 2022, https://www.greenpolicyplatform.org/sites/default/files/downloads/resource/debt-for-nature-swaps.pdf.
 See Appendix for sources.
 Esteban Duarte and Selcuk Gokoluk, “BofA-Led Debt Swap for Gabon Moves Ahead With $500 Million Bond,” Bloomberg News, August 2, 2023, https://www.bloomberg.com/news/articles/2023-08-02/bofa-led-debt-swap-for-gabon-moves-ahead-with-500-million-bond.
 Marc Jones and Rodrigo Campos, “Ecuador Seals Record Debt-for-Nature Swap with Galapagos Bond,” Reuters, May 9, 2023, https://www.reuters.com/world/americas/ecuador-seals-record-debt-for-nature-swap-with-galapagos-bond-2023-05-09/.
 Guillaume Chabert, Martin Cerisola, and Dalia Hakura, “Restructuring Debt of Poorer Nations Requires More Efficient Coordination,” IMF Blog, April 7, 2022, https://www.imf.org/en/Blogs/Articles/2022/04/07/restructuring-debt-of-poorer-nations-requires-more-efficient-coordination; Natasha White, “Debt-for-Nature Swaps Gain Traction Among Developing Countries,” Bloomberg, November 7, 2022, https://www.bloomberg.com/news/articles/2022-11-07/debt-for-nature-swaps-offer-option-for-developing-countries.
 Adelle Thomas and Emily Theokritoff, “Debt-for-Climate Swaps for Small Islands,” Nature Climate Change 11 (November 2021): 889–893, https://www.nature.com/articles/s41558-021-01194-4.
 Since Seychelles’ blue bond was sold to three investors via private placement, it was not rated.
 Kenza Bryan and Joe Daniels, “UK Fund Giant L&G Bets on Ecuador’s Galápagos Debt Experiment,” Financial Times, May 24, 2023, https://www.ft.com/content/e895761d-63c6-44e7-84d8-ca6dd89a6a20.
 Isabelle Gerretsen, “The Deal that Saved Seychelles’ Troubled Waters,” BBC Future, August 3, 2020, https://www.bbc.com/future/article/20200803-the-deal-that-saved-seychelles-troubled-waters.
 The Nature Conservancy, “Case Study: Belize Debt Conversion for Marine Conservation,” May 17, 2022, https://www.nature.org/content/dam/tnc/nature/en/documents/TNC-Belize-Debt-Conversion-Case-Study.pdf.
 In Belize’s case, the participation of more than 75 percent of holders of its bonds allowed for the amendment of the existing bonds.
 The Nature Conservancy, “Case Study: Barbados Blue Bonds for Ocean Conservation,” May 10, 2023, https://www.nature.org/content/dam/tnc/nature/en/documents/TNC-Barbados-Debt-Conversion-Case-Study.pdf.
 Esteban Duarte and Natasha White, “Ecuador’s Planned $800-Million Debt-For-Nature Gets IDB Guarantee,” Bloomberg News, May 3, 2023, https://www.bloomberg.com/news/articles/2023-05-03/ecuador-s-planned-800-million-debt-for-nature-gets-idb-guarantee.
 Marc Jones and Rachel Savage, “Gabon Launches Tender for Africa’s First Debt-for-Nature Swap,” Reuters, July 25, 2023, https://www.reuters.com/world/africa/gabon-launches-tender-africas-first-debt-for-nature-swap-2023-07-25/.
 See Ministry of Finance of Ecuador, “Government of Ecuador announces debt for nature swap operation to preserve Galapagos Islands’ biodiversity,” press release, May 11, 2023, https://ire.finanzas.gob.ec/press.php.
 Marleen S. Schutter and Christina C. Hicks, “Networking the Blue Economy in Seychelles: Pioneers, Resistance, and the Power of Influence,” Journal of Political Ecology 26, no. 1 (2019): 425–447, https://journals.librarypublishing.arizona.edu/jpe/article/2121/galley/2380/view/.
 Gautam Jain, “Thematic Bonds: Financing Net-Zero Transition in Emerging Market and Developing Economies,” Center on Global Energy Policy, Columbia University, December 12, 2022, https://www.energypolicy.columbia.edu/publications/thematic-bonds-financing-net-zero-transition-emerging-market-and-developing-economies/.
 Chetan Hebbale and Johannes Urpelainen, “Debt-for-Adaptation Swaps: A Financial Tool to Help Climate Vulnerable Nations,” Brookings Institution, March 21, 2023, https://www.brookings.edu/articles/debt-for-adaptation-swaps-a-financial-tool-to-help-climate-vulnerable-nations/.
 The Nature Conservancy, “Seychelles Achieves 30% Marine Conservation Commitment,” March 16, 2018, https://www.nature.org/en-us/about-us/where-we-work/africa/stories-in-africa/seychelles-conservation-commitment-comes-to-life/.
 Marcos Chamon, Erik Klok, Vimal Thakoor, and Jeromin Zettelmeyer, “Debt-for-Climate Swaps: Analysis, Design, and Implementation,” IMF Working Paper, August 2022, https://www.imf.org/en/Publications/WP/Issues/2022/08/11/Debt-for-Climate-Swaps-Analysis-Design-and-Implementation-522184.
 Natasha White, “Wall Street’s New ESG Money-Maker Promises Nature Conservation —With a Catch,” Bloomberg, January 11, 2023, https://www.bloomberg.com/news/articles/2023-01-12/bankers-bet-millions-on-sovereign-debt-deals-tied-to-green-goals.
 Quentin Paul, Pierre‑François Weber, and Romain Svartzman, “Debt‑for‑Nature Swaps: A Two‑Fold Solution for Environmental and Debt Sustainability in Developing Countries?” Banque de France, 244/2, January/February 2023, https://publications.banque-france.fr/sites/default/files/medias/documents/823003_bdf244_2-en_version_finale.pdf.
 Ibid., Jain et al. (2023), Kearse (2023), and Kenza Bryan and Joe Daniels, “UK Fund Giant L&G Bets on Ecuador’s Galápagos Debt Experiment,” Financial Times, May 24, 2023, https://www.ft.com/content/e895761d-63c6-44e7-84d8-ca6dd89a6a20.
 Chamon et al. (2022).
 Jain et al. (2023).
 Fragility of the state and a lack of transparency and commitment to climate goals have been identified as factors limiting the eligibility of countries for debt-for-nature swaps. See Divjot Singh and Vikram Widge, “Debt for Climate Swaps: Supporting a Sustainable Recovery,” Climate Policy Initiative, May 2021, https://www.climatepolicyinitiative.org/wp-content/uploads/2021/05/Debt-for-Climate-Swaps-Blueprint-May-2021.pdf.
 Many countries facing debt distress or default with urgent climate needs could potentially be candidates for these instruments if it were not for their governance challenges. One example is Venezuela, a country under authoritarian rule facing a complex humanitarian crisis and severe environmental issues of global significance. Were political conditions to radically change, Venezuela could be a candidate for such a transaction—as part of a comprehensive debt restructuring program—given the urgent need to protect and restore the country’s Amazon region which, has experienced rapid deforestation. See Gideon Long, “Venezuela’s Environmental Crisis: ‘The Beginning of a Wave of Destruction,’” Financial Times, January 16, 2022, https://www.ft.com/content/92583389-fcf7-43d1-b1f9-6516b4370bc2; Singh and Widge (2021); Jain et al. (2023).
 Kenza Bryan, David Pilling, and Mary McDougall, “Gabon Finalises First Debt-for-Nature Swap in Africa,” Financial Times, August 15, 2023, https://www.ft.com/content/23c1c1ce-59ef-4fee-8b86-fed2c3e5f3b1.
 See, for instance, on the difficulties with such conditionalities, Eric F. Lambin et al., “The Role of Supply-Chain Initiatives in Reducing Deforestation,” Nature Climate Change 8, no. 2 (January 29, 2018) 109–116, https://www.nature.com/articles/s41558-017-0061-1; Rachael D. Garrett, Janina Grabs, Federico Cammelli, Florian Gollnow, and Samuel A. Levy, “Should Payments for Environmental Services be Used to Implement Zero-deforestation Supply Chain Policies? The Case of Soy in the Brazilian Cerrado,” World Development 152, April 2022, 105814, https://www.sciencedirect.com/science/article/pii/S0305750X22000043.
As the world races to transition to cleaner energy sources, there exists a substantial gap between the financing required for this transition and the actual investments being made.
On May 18, 2023, the India Program at the Center on Global Energy Policy (CGEP) at Columbia University’s SIPA held the Columbia India Energy Dialogue in partnership with the Columbia Global Center in Mumbai.