In a debt-for-nature swap, a country that has received development finance can cancel its debt if it agrees to earmark the funds it would have paid for debt servicing for financing programs that protect biodiversity. This arrangement supports biodiversity conservation in emerging and developing economies.
Debt-for-nature swaps can be structured in two ways (Perera et al., 2018, p. 42):
- “The creditor government waives all or a part of their credit rights, and the debtor government invests the equivalent value in biodiversity conservation.”
- “The creditor government sells all or a part of the debt outstanding to an organization with the expertise to carry out biodiversity conservation work in the debtor country.” The debt is usually sold by the creditor government to the third-party organization at a price lower than its face value. The debtor country then repays the outstanding debt to the third party, who in turn uses the payments to fund biodiversity conservation efforts.
In the first option, it is important to establish a fund into which the proceeds from the debt-for-nature swap will be invested. The establishment of a fund demonstrates the long-term commitment of the debtor government to using the debt-for-nature swap proceedings for conservation and enables the creditor government to monitor progress. It is best if the debtor government invests the proceeds in an environmental trust fund set up in their country. Grants or loans from the trust can then be used to finance the maintenance of the country’s protected areas and the conservation of biodiversity. Alternatively, proceeds from the debt-for-nature swap could be invested in an endowment fund that will ensure long-term, annual funding for projects. Typically, the trust fund or endowment fund is independent of government, although government representatives often sit on their boards of directors.
There is also an adjusted debt-for-nature swap instrument called a subsidized debt swap. In this case, a non-governmental organization (potentially the organization implementing conservation projects) commits to providing complementary financial resources in addition to the debt-reduction commitment of a creditor government. This commitment can increase the overall financial volume and incentivize the implementing organization to use resources wisely and impactfully.
Debt-for-climate swaps are an adjacent concept in which debt is exchanged for investment in climate change projects, although these are not necessarily strictly adaptation focused. There have only been a few small-scale climate-related debt-for-nature swaps, including Italy fulfilling EUR 38 million of its fast-start climate finance commitments via debt-for-nature swaps in Vietnam, Ecuador, and the Philippines.
Current or potential adaptation-relevant sector applications:
- ecological services and management – forest management (including afforestation and reforestation); wetlands; ecosystem and biodiversity protection, conservation, and enhancement;
- water supply (infrastructure) – water management;
- coastal and riverine protection and management – coastal defences or flood protection barriers; river flood protection measures; and
- disaster risk reduction – early warning and observation systems.
Additional insights:
- This is a mature instrument. It first emerged in 1987 to help address the Latin American debt crisis.
- Debt-for-nature swaps had been used in over 30 countries and had restructured USD 2.5 billion of debt and released USD 1.2 billion into conservation projects by 2022. In 2022, debt-for-nature swaps were under evaluation for Gabon, Sri Lanka, Cape Verde, and Laos (United Nations Development Programme, 2023).
- The average size and total volume of debt-for-nature transactions have been relatively small, and they typically have not been pursued to address debt sustainability, but rather to create fiscal scope to address nature and conservation priorities. Recent transactions in Belize (2021) and Ecuador (2023) may represent a scaling-up in volume.
- There is renewed interest in debt-for-climate swaps, but the International Monetary Fund argues that the economic case is narrow. For example, debt-for-nature swaps may be worth pursuing if they can increase fiscal space for adaptation actions when grants are not available.
Considerations for using Debt-for-Nature Swaps:
- Legal certainty must be established by the creditor governments to assure that debt-for-nature swaps indeed lower the debt burden to the extent agreed.
- Some donor countries have established eligibility criteria for debtor countries that include financial, political, economic, and/or environmental requirements.
- Feasibility studies and due diligence commonly take place to prepare new debt-for-nature swaps. These are undertaken to identify the share of debt eligible for a debt-for-nature swap and the creditor’s willingness to swap, as well as to select financial vehicles to receive the newly available funds and terms for receiving proceeds.
- The risk of corruption needs to be eliminated. The fund structure (financial vehicle) and a reliable implementation organization need to be carefully selected. The financial vehicle might also have a board consisting of members from the creditor and debtor countries.
- Clear conservation targets need to be established and potential indicators defined to monitor performance and impact.
Adapted from the following sources:
Chamon, M., Klok, E., Thakoor, V. V., & Zettelmeyer, J. (2022). Debt-for-climate swaps: Analysis, design and implementation (IMF working paper). International Monetary Fund. https://www.imf.org/en/Publications/WP/Issues/2022/08/11/Debt-for-Climate-Swaps-Analysis-Design-and-Implementation-522184
Fuller, F., Zamarioli, L., Kretschmer, B., Thomas, A., & De Marez, L. (2018). Debt for climate swaps: Caribbean outlook. Climate Analytics. https://climateanalytics.org/media/debt_for_climate_swap_impact_briefing.pdf
Perera, O., Wuennenberg, L., Uzsoki, D., & Cuéllar, A. (2018, July). Financing soil remediation: Exploring the use of financing instruments to blend public and private capital. International Institute for Sustainable Development. https://www.iisd.org/system/files/publications/financing-soil-remediation.pdf
United Nations Development Programme. (2023). (Re)orienting sovereign debt to support nature and the SDGs: Instruments and their application in Asia-Pacific developing economies. https://www.undp.org/publications/reorienting-sovereign-debt-support-nature-and-sdgs-instruments-and-their-application-asia-pacific-developing-economies