Financial innovations for environmental and climate change actions

Debt-for-nature swaps are attracting a lot of attention from financial markets, environmental constituencies, multilateral development institutions, and the media, following the recent transactions with Barbados in November 2022 and Ecuador in May 2023. Their potential has also been highlighted by the recent Paris Summit for a New Global Financing Pact. These operations enable the mobilization of new financing from private investors, in support of environmental action - in this case, in favor of marine conservation - for important amounts: $50 million for Barbados, $340 million for Ecuador, while substantially reducing the cost of servicing sovereign debt in the beneficiary countries.

However, the interest - and the complexity - of these operations goes far beyond their financial component. They lead to institutional and administrative reforms in the beneficiary countries, in support of environmental protection, as well as the establishment of original governance frameworks. These dimensions (and these complexities) must be taken into account when assessing whether this instrument could be developed more widely, towards other environmental or social applications, such as health.

This note presents the main features of these instruments, based on the cases of Barbados and Ecuador, the conditions for their success, and their strengths, but also their possible fragilities. In a wide, comprehensive perspective, these instruments should also be considered in connection with other innovative financial tools, such as market-based insurance of natural ecosystems or sustainability-linked bonds whose credit terms depend on the respect of environmental conditions.

Fundamentally, the interest of these debt conversion operations lies in the fact that they could help  reduce the opposition between the "North" and the "South" on environmental and climate issues around the practical and concrete recognition, thanks to these mechanisms, that biodiversity and natural ecosystems can constitute a capital, an asset, that developing countries can benefit from financially and fiscally, as long as they ensure their protection.