It has just been announced that the central African state of Gabon has finalised a $436 million “debt-for-nature” swap, to help fund marine conservation. In particular, this relates to the protection of the world’s largest population of endangered leatherback turtles, along with Atlantic humpback dolphins, manatees and sawfish.
The Gabon government also intends to put $5 million a year towards tackling illegal fishing and safeguarding 30% of its coastal waters.
The deal follows news earlier this year that Ecuador had struck the largest ever debt-for-nature agreement, by refinancing $1.6bn of its commercial debt at a discount, in exchange for an $18 million annual flow of environmental revenue. In this instance, the funding will be used for conservation around the Galápagos Islands.
We could be seeing a lot more similar types of green investments in the future. According to Bloomberg, the market for debt-for-nature swaps could exceed $800bn, setting off feverish competition amongst banks.
Debt-for-nature swaps are designed to relieve cash-strapped countries of their debt burden. What’s owed is bought up by a bank or specialist investor, in return for a cheaper loan. To ensure there is a reduction in the borrowing costs, typically a development finance “credit guarantee” or “risk insurance” would be introduced. The savings produced then go towards funding conservation projects.
In Gabon’s case, its debt has been switched to a new $500 million “blue bond” with a lower interest rate and longer maturity. Whilst the country pays down on what it owes on more favourable terms, if all goes to plan, over the next 15 years the transaction should generate $163 million for marine conservation projects.
Risk insurance for Gabon’s new “blue bond” was provided by The U.S. Development Finance Corporation (DFC). Moody’s have given it an Aa2 investment grade credit rating – way above the government’s own “junk” Caa1 grade.
A win-win situation
Supporters of the debt-for-nature principle – originating during the 1980s debt crisis from an idea spawned by the late “father of biodiversity”, Thomas Lovejoy – say it is a win-win situation for financiers, countries and conservationists alike.
Indeed, Gabon’s President Ali Bongo said the swap was an important moment for eco-friendly finance deals in Africa.
And Slav Gatchev, head of sustainable debt at The Nature Conservancy (TNC), the U.S. non-profit organisation which advised Gabon’s government over the deal, said it had addressed biodiversity, climate and debt problems all in one go.
“The world is facing a biodiversity, climate and debt crisis, which is even more pronounced in the developing world. There is an overlap between biodiversity hotspots in the tropics and excessive levels of debt,” said Mr Gatchev, revealing that the eco-friendly swaps TNC was negotiating could total $10 billion by the end of the decade.
“Typically, countries approach us because they’ve seen that these deals can be done at scale,” he added.
Debt risk still remains
But whilst the latest Gabon deal has been hailed as a notable money-saving environmental victory, some investors feel more needs to be done to make similar investments an attractive proposition.
The new bond comes with 6.097% interest, much cheaper than the 9-10.5% yield at which other bonds have been trading. But Andrew Stanners, investment director at emerging market investor Aberdeen, which holds some of Gabon’s current bonds, warned that whilst the deal made fiscal sense, there were question marks over how Gabon’s conservation promises would be enforced. And, in addition, how the DFC insurance pledge would work, if Gabon happened to default.
Meanwhile, M&G Investments Fund Manager, Gregory Smith, referring to the bonds’ nominal values, questioned why the swap had bought back only $95 million of a bond that would need refinancing in 2025, compared to $405 million of its two 2031 maturing bonds.
“This transaction offered a chance to eliminate this debt risk. But after this transaction, that risk remains,” he wrote.
Accusations of greenwashing and project short-changing
Detractors of debt-for-nature deals warn of greenwashing, criticising agreements where banks often take large fees, with comparatively small amounts going to conservation.
In January, Barclays issued an investment note questioning the green credentials of debt-for-nature swaps, which are often sold as Environmental, Social and Governance (ESG) investments. Their reasoning was that only a small proportion of each deal ever went towards conservation. This claim, however, has been strongly disputed by the banks involved.
Separately, Daniel Ortega Pacheco, a former Ecuadorian environment minister, was concerned about the potential implications of the agreements surrounding a country’s sovereignty.
“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 said.
And Katie Kedward, a UCL research fellow, said the agreements weren’t going 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.
“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 observed.
Nevertheless, Gatchev reckoned such concerns were unfounded, pointing to beneficial deals arranged for Belize and Barbados. These had been tailored to their specific requirements, with an eye to potential problems in the future, he said.
One thing is for sure – this is not the last we will hear about debt-for-nature swaps.
Gabon ‘blue bond’ swap raises hopes for wave of African debt-for-nature deals | Reuters
Are debt-for-nature swaps the way forward for conservation? | Conservation | The Guardian
