Could debt be used to drive nature restoration?
The world’s biodiversity needs financial support
The world’s biodiversity needs financial support. A recent study by the Paulson Institute, Financing Nature , demonstrates that reversing the decline of biodiversity will require more than $700 billion per year over the next ten years.
How can we pay for it, particularly in developing economies, where budgets are being deeply distressed by the COVID-19 pandemic? One potential solution is to use sovereign debt to drive nature restoration. Greening Sovereign Debt: Building a Nature and Climate Sovereign Bond Facility , a new report by the Finance for Biodiversity Initiative (F4B) with support from the Paulson Institute, explains how this could work.
Sovereign debt is a central government’s debt. Governments create debt by issuing government bonds and bills, which raise money to finance growth and development. Many developing countries borrow money from development banks such as the World Bank, the regional development banks, and bilateral country development banks to finance infrastructure or public health programs.
In normal times, countries make payments on their debt, and the payments are generally within their regularly budgeted expenditures. In times of economic stress, however, many countries are forced to greatly increase their debt simply to maintain government services. This has created a debt crisis across dozens of countries, each of which is trying to navigate COVID-19’s devastating economic effects.
For example, right now, data from the International Monetary Fund show that the current pandemic has pushed more than 50 percent of low-income countries into risk of sovereign debt distress. This creates pressure on the lenders—mostly international financial institutions and developed countries—to offer debt relief by giving those countries more time to pay through restructuring the debt or by writing off the debt altogether. In May 2020, G20 countries established the Debt Service Suspension Initiative to help provide relief. Through the initiative, around $5 billion of debt relief has been delivered to more than 40 countries so far, but debt restructurings in Angola, Argentina, Belize, Ecuador, Kenya, Lebanon, Suriname, and Zambia demonstrate the harsh financial realities facing developing economies at this time.
Given that much of the world’s biodiversity, such as tropical forests, are located in developing countries in sovereign debt distress, there is a unique and powerful means by which these countries’ debt obligations could be eased and, at the same time, leverage this debt to drive nature protection. This concept is called a debt for nature swap. In a debt swap, borrowing countries are given preferential terms such as reduced payments or debt write-offs in return for increasing the protection or restoration of critical national ecosystems such as tropical forests, grassland, wetlands, or marine areas.
The debt for nature swap is not a new idea. Both bilateral and commercial lenders have participated in debt swaps with debt-stressed countries since the late 1980s. However, the concept has gained greater prominence given the growing triple global threats of the rapidly worsening sovereign debt crisis, biodiversity loss, and climate change.
The F4B report explores how the use of debt for nature swaps can be expanded. It sets out the core design of a new Facility that would help to promote, coordinate, and standardize sovereign debt with biodiversity and climate benefits. According to the proposal, the Facility would “offer practical support to debtors, creditors and other policy and market actors, and experts in advancing nature- and climate-linked sovereign debt investments.” Its mandate would be to develop nature- and climate-linked sovereign debt with Paris Club and government lenders and other stakeholders.
The proposed trade-off argument is that developed countries benefit from the clean air, clean water, biodiversity, and climate regulation provided by nature in developing biodiversity-rich countries.
Of course, the lending institutions and countries would need to accept the “public good” of protecting and restoring nature as at least a partial payment of their debt. The proposed trade-off argument is that developed countries benefit from the clean air, clean water, biodiversity, and climate regulation provided by nature in developing biodiversity-rich countries.
Does this idea have any chance of being taken up by the world’s financial institutions and the governments of developed countries? There are encouraging signs, including from the World Bank. The IMF-World Bank Spring Meetings in April and the G7 and G20 meetings this year are key forums where the emerging sovereign debt crisis, exacerbated by the COVID-19 pandemic, and how to address it will be discussed. The current negotiations on a new international framework to tackle biodiversity loss, culminating at the 15th Conference of the Parties (COP 15) to the UN Convention on Biological Diversity in Kunming, China, will also be a crucial forum for promoting debt for nature swaps.
Utilizing debt to promote protection and restoration of nature could help relieve the debt crisis while, at the same time, contribute to slowing global biodiversity loss. Any innovation that can simultaneously address the triple crises of debt, climate change, and biodiversity loss is a tool too valuable to ignore.