Now What? (Part 2)

Get Your Org Engaged in Financial Innovation for Good

This continues to be a challenging moment for environmentalists and all progressives. Over the period ahead, we’ll likely make good progress in determining the full set of strategies needed to address challenges like climate change and biodiversity. But, as we wrote in our last issue, there is a lot we can and should do right now. That's our focus again here: what you and your organization can do now.

First, we want to reinforce the point we made in our most recent issue: everyone can help grow the coalition needed to support pragmatic environmental action. What’s happening in Michigan, for example, could be pursued everywhere.

But another opportunity for immediate action came into stark relief recently: the long-discussed challenge of getting capital to flow from the developed world to lower-income countries for investments in the energy transition, climate adaptation, biodiversity protection, and other sustainability opportunities.

Debt-for-nature swaps are one of our favorite tactics in this realm. If you’re interested in the details, please check out that prior issue where we laid out clearly how this innovative structure, made possible by numerous players in both the developed and developing worlds, can create “free money” to fund investments in sustainability. In that post, we also emphasized the opportunity for many additional players to get off the sidelines and into the game, and we included many examples.

Well, good news. . . it’s happening.

The government of the Bahamas just announced a new debt swap: refinancing $300 million of its debt and in the process freeing up more than $120 million to fund ocean conservation and management.

And a few weeks earlier, El Salvador announced a debt swap of roughly $1 billion dollars for investments in the Lempa River (Rio Lempa) watershed. Now this week Ecuador announced its plans for a $1 billion swap to fund investments for the protection of the Amazon forest.

What grabbed our attention about these cases is how—as we encouraged—new players stepped up, especially in the important area of credit enhancement. Credit enhancement is critical for these deals to work because it allows new debt to be issued at a lower interest rate to retire old debt with a higher rate and at a discount. It's precisely these savings that fund the conservation efforts.

Up to this point, such credit support has most frequently been provided by the US government’s international development agency (DFC) or the Inter-American Development Bank (the IDB).

But this time, in addition to the IDB, credit support is being provided by a private impact investor—Builders Vision (Lukas Walton)—as well as by a private sector corporate player—AXA XL. Both firsts. There is no reason other impact investors and/or private corporations can’t also get in the game of providing credit enhancement to make good things happen.

This was also a first foray into the debt swap business for Standard Chartered, which served as the principal bank on the Bahamas deal.

On the NGO front, most recent debt swaps have been led by my former organization, The Nature Conservancy. (The Pew Charitable Trusts led another). But in El Salvador’s case, we saw a new NGO get in the game—Catholic Relief Services.

And NGOs are doing more. Six leaders (TNC, Pew, Conservation International, Re:Wild, The Wildlife Conservation Society, and WWF) recently announced a joint initiative to standardize as much as possible various complex aspects of these deals so that they can be streamlined and become easier to accomplish. People always say they want NGOs to collaborate more. Bravo to them for doing exactly that here.

If all of these new players can get involved, so can many more. That’s the opportunity we want to highlight. There is plenty to do by other NGOs, private sector companies, impact investors, financial institutions, and multilateral banks.

If you’re wondering what this has to do with you, I’ll note that many of our subscribers work at precisely the kinds of organizations mentioned in the paragraph above. Some of you even lead these organizations. Please think hard about how your organization can step up right now and do more to achieve pragmatic, common-sense environmental progress.

Kudos to all the players noted above. You’re an inspiration. For everyone else, let’s think hard about what we can do now.

Addendum- More breaking good news.

As I was finishing up this post, an exciting news release from the World Bank came to my attention. It announced that Côte d’Ivoire will complete a “debt-for-development” swap with the World Bank’s support. The money saved by replacing higher-cost debt with lower-cost funding will be invested to improve education across the country. This is a great example of new players creatively using the debt conversion structure for societally positive investments beyond conservation.

Onward,