With debt-for-nature swaps having a resurgence in the past few years, Kay McCarthy, Head of Jersey Office at The International Stock Exchange (TISE), discusses how this innovative form of financing has helped developing economies reduce their debt obligations whilst supporting conservation programs.

Debt-for-nature swaps (DFNs) are debt restructuring tools aimed at refinancing part of a country's debt at lower relative interest rates in return for a commitment to spend a portion of savings on nature conservation. Creditors provide debt relief in return for a government commitment to initiatives such as decarbonisation, investment in climate-resilient infrastructure or protecting biodiverse forests.

Debt conversion operations generate significant savings as the country will be replacing more expensive commercial debt with cheaper guaranteed debt, delivering a debt service cost reduction for the country due to the expected lower coupon and the lower principal amount on the new debt.

"Creditors provide debt relief in return for a government commitment to initiatives such as decarbonisation,."

The ‘swap’ transaction will typically involve a number of parties, including the creditor country, a commercial bank and an environmental non-governmental organisation acting as an intermediary, such as The Nature Conservancy (TNC). In fact, international conservation organisations have initiated or brokered most debt-for-nature swaps. Other intermediaries can include multilateral development banks, private finance institutions and insurance companies.

Over the last couple of years, DFNs have been reviewed for their effectiveness at a time when biodiverse, developing countries are struggling with debt payments and are having to find the financial means to meet biodiversity and climate targets.

History

The concept is not new, in fact it has been around for decades. The idea was first envisioned by Thomas Lovejoy of the WWF in a New York Times article in 1982 where he suggested conservation groups use this type of swap to raise money in developing countries to pay off foreign debt through investments in conservation, observing that much of the world's biological diversity is harboured in the same countries that face the greatest financial strain from foreign debt burdens. 

"The concept is not new, in fact it has been around for decades."

Since then, billions of dollars in funding have been directed toward environmental protection through this approach. The first agreement was signed between the US based environmental non-profit organisation, Conservation International and Bolivia in 1987. Since then, Costa Rica, the Philippines, Belize, Barbados, Gabon, Seychelles, Ecuador, and El Salvador among others, have all entered into similar agreements.

Recent activity

Ecuador’s high-profile deal in 2023 made DFNs a hot topic in conservation financing when they completed one of the world’s largest swaps to support conservation efforts in the Galápagos Islands through the sale of a blue bond.

Credit Suisse helped Ecuador buy back around US$1.6 billion of debt for US$644 million, saving the country around a billion dollars in repayments over 17 years. In return, the Ecuadorian Government has committed to spending US$18 million annually for 20 years on conservation in the Galapagos. 

"In December 2024, Ecuador announced its second debt conversion for Amazon conservation."

In December 2024, Ecuador announced its second debt conversion for Amazon conservation, raising US$450 million to protect and manage the forests and wetlands of its Amazon rainforest. The conservation program and financing package was supported by TNC, along with the Government of Ecuador.

This is the sixth project supported by TNC’s Bonds Program, alongside those in Seychelles, Belize, Barbados, Gabon, and The Bahamas, and it is the first ever Nature Bonds project focused on terrestrial and freshwater conservation.

In October, El Salvador completed a ground-breaking tender offer to buy back its existing bonds at a discount to their issuance value, with a US$1 billion debt for nature transaction to fund conservation of the Lempa River and its watershed. 

Following these high-profile transactions many developing countries are believed to be contemplating DFNs to reap the dual benefits of external debt relief and fiscal capacity to enable them to make pressing environmental or climate related investments.

The market for DFNs is poised to exceed US$800 billion, according to Bloomberg.

Limitations

Having said that, this form of climate financing is not a cure all for environmental issues in the least-developed countries with the World Bank saying that swaps cannot, by themselves, solve debt or environmental problems, but they do help to alleviate both as they protect the forests and their human, animal and bird inhabitants. Costa Rica, for example, has retired a fifth of its foreign debt through such swaps, while spending more than US$100 million on protecting its dry and tropical rain forests.

It is also the case that the full amount of the fiscal savings generated by a debt conversion will not go towards the conservation objectives. However, the funds that are designated have to be used for that purpose in accordance with very specific parameters set out and the consequences of breaching any conservation funding obligations are clearly defined.

"Despite some limitations, DFNs have been valuable, not only in lightening debt burdens but also creating a framework for environmental protection."

Despite some limitations, DFNs have been valuable, not only in lightening debt burdens but also creating a framework for environmental protection. They can help create space for countries to make climate adaptation plans that also help preserve livelihoods that depend on biodiversity, such as fishing or collecting forest produce.

One of the most important successes of these financial agreements has been their ability to influence conservation over the long term, with the swaps providing a long-term source of funding which facilitates the implementation of conservation programmes with long time horizons.

Sustainable finance and TISE

Renewed interest in DFNs is being driven by urgency around climate change and the growing number of countries with elevated levels of debt vulnerability. These factors, together with the growth of ESG investments, are reflected in investors' increased appetite for climate and conservation linked debt instruments.

"DFNs [are] one recent trend that we expect to see increase as issuance continues."

At TISE, we see many variations of ESG thematic bonds list on the Exchange, including on our sustainable finance segment, TISE Sustainable. At the end of February 2025, the total value of all listings on TISE supporting environmental, social, and sustainable initiatives grew to £26.1 billion, reflecting the continued increase in capital being allocated to these asset classes by a wide range of investor groups. We have admitted sustainable and ESG-rated issuers, green bonds, sustainable bonds, sustainability-linked bonds, and humanitarian catastrophe bonds, with DFNs being one recent trend that we expect to see increase as issuance continues.

This article was originally published in the Jersey Evening Post, March 2025