Relieve Debt to Protect the Environment

The world’s poorest nations are caught in a vicious cycle. Often heavily dependent on natural resources, they must protect nature while adapting to a changing climate. Most struggle to do so. Given pandemic spending and high interest rates, debt and interest payments have ballooned, sucking up scarce public funds. Catastrophic storms and forest losses then further strain economies and increase debt. Without effective interventions, these interacting crises will exacerbate a downward spiral.

Half a century ago, Latin America’s debt crisis collided with rainforest destruction in a similar way. Environmentalists warned that crushing loan payments were pushing developing countries to spend less on protecting nature. Even worse, they might sell natural resources, such as tropical timber, to generate foreign exchange to make debt payments.

In 1984, Thomas Lovejoy—the scientist who coined the term “biodiversity”—introduced debt-for-nature swaps as an elegant way to help cash-strapped developing countries protect forests and other natural resources while reducing their debt. Lovejoy proposed that international conservation organizations purchase debt and then retire it in exchange for the debtor nation’s commitments to mobilize domestic resources (local currency or other assets) for agreed environmental purposes, such as expanding national parks.

The inaugural nature swap occurred in 1987. Conservation International bought $650,000 in Bolivian debt at a large discount on the secondary market and then retired it in exchange for expanded protection of the Beni Biosphere Reserve. In subsequent decades, scores of such swaps followed in Latin America and eventually worldwide.

By the 1990s, nature swaps had evolved. Lending governments and multilateral development banks took the lead in negotiating and financing. (Conservation organizations continued to play valuable supporting and subsidizing roles.) By the 2000s, the scope of nature swaps had also evolved, expanding the model to address other goals such as climate and economic development.

Nature swaps continue to this day. Ecuador recently engaged in the largest swap ever conducted. With the help of Credit Suisse, the government bought back $1.6 billion in debt at a near 60 percent discount. It converted it into a “blue bond” that will channel over $12 million annually to marine conservation in the Galápagos islands. An $85 million guarantee from the Inter-American Development Bank and $656 million in political risk insurance from the U.S. International Development Finance Corp. substantially reduced the risk of this new bond.

Nature swaps offer attractions for all parties involved. Debtor nations receive financial relief, as environmental commitments are smaller than debt reductions and are paid in local currency. Creditors are relieved of risky loans that might not have been repaid and could garner reputational benefits through associations with environmental activities. Conservation organizations benefit from increased commitments to fund nature conservation.

Despite perceived benefits, nature swaps remain niche financial instruments. Their impacts on both debt and conservation have been modest. Over four decades, nature swaps reduced about $3 billion in debt to unlock around $1 billion in conservation investments. While a valuable contribution, the relief and subsequent investments are a small fraction of the $100 billion or so spent annually on biodiversity conservation globally. (From debtors’ perspectives, the relief is an even smaller sliver of their total debt burdens.)

While their potential for gain is clear, their shortcomings have limited impacts. Why, then, have they not been adopted more widely?

The complex and lengthy negotiations needed for swaps have deterred debtor governments, especially when relief is small relative to debt. Financial, conservation, and legal agreements among multiple parties—each bargaining hard for their position—can take years to finalize.

Furthermore, the fear that promised environmental benefits never materialize discourages lenders. This is due, in part, to the fungibility of public spending. Total conservation funding might not increase if debtor nations divert domestic government funds to other projects when the debt relief funding arrives. Even when projects are deemed successful at the local level, they may not generate a net benefit for the entire country if they have displaced damages to another location. For example, in the 1990s, new park protection in Madagascar pushed farmers to clear unprotected rainforests elsewhere.

Finally, national sovereignty has been a concern, beginning with the very first nature swap in Bolivia. Swaps can empower creditors and conservation organizations to attempt to dictate domestic activities.

Yet, with debt distress in the global south at historic highs and many indebted countries already facing economic losses from climate change, there is a drumbeat to address interconnected debt, climate, and biodiversity crises. The Ecuadorian nature swap targeting the Galápagos and recent swaps in the Seychelles, Belize, and Barbados have reinvigorated interest in the policy. Calls are coming from the likes of the U.N. Development Program, International Monetary Fund (IMF), and national leaders in the global south.

Nature swaps could become a more powerful means of addressing these enormous and interrelated crises. To do so, this financial instrument must be reformed. We propose four changes, drawing on lessons from decades of nature swaps and evaluations of conservation and development policies.

First, increase the scale significantly. Instead of relieving individual loans in exchange for specific projects, nature swaps must reduce debt at a scale consequential for a country’s sovereign debt. This would contribute to real gains in fiscal health. To date, Belize’s nature swap in 2021 is the only deal to address a country’s entire debt—and its credit rating rose. Financially consequential scale increases debtor interest, as high transaction costs are worthwhile for large gains.

Naturally, debtors’ environmental commitments should similarly be scaled upward. They must encompass a nation’s entire biodiversity and climate needs. The current model of nature swaps focuses on local projects, such as supporting the protection, restoration, and management of three biodiversity rainforests in the Peruvian Amazon or constructing seawalls and replenishing beaches in Tunisia.

This contrasts with our suggested national scale. For example, a country might create a national renewable energy plan with tax incentives to bring country emissions in line with its Paris Agreement targets for greenhouse emissions and climate adaptation. Another debtor country might focus on improving outcomes across its entire national park system to meet protected area targets agreed to for the Kunming-Montreal Global Biodiversity Framework. At this scale, nature swaps could help developing countries make material progress on their international environmental commitments.

Second, nature swaps must demonstrate environmental performance. Debt relief should reward achieving agreed outcomes. This contrasts with the current model, where debt relief is provided automatically when specific actions are taken—and sometimes merely if promised.

Evaluations of past conservation and development projects repeatedly find touted actions to be less impactful than advertised. Following our recommendation, debt relief would be conditioned on achieving specific and measurable benchmarks. Examples might be expanded national forest cover in key biodiversity areas, healthy stocks of sharks and other at-risk marine species, or drops in national carbon dioxide emissions. Resource stocks or gas emissions would be measured for entire countries—not single locations—eliminating the mere displacement of damage to other parts of a country.

Third, debtors must be able to choose how to implement the policy. Once specific biodiversity and climate benchmarks are agreed, debtors must be given the full authority to decide how to achieve them. This addresses concerns that their sovereignty could be trampled. It also incentivizes the use of local knowledge of priorities and efficiencies.

For example, a nature swap agreement to protect 30 percent of a country should allow the debtor country to decide where protected areas will be established. Similarly, an agreement to reach Paris emissions targets would allow a debtor country to decide whether to shift to renewable energy sources for rural communities, adjust energy policies and tax incentives to improve urban energy efficiency, or both. The relief benchmark would be forest cover or the level of emissions, respectively—not how they were achieved.

Fourth, nature swaps must allow debtor countries to meet multiple competing goals simultaneously—and get credit for all of them. For example, forest protection could earn credits for habitat conservation, carbon storage, resistance to torrential rains and other extreme weather events, and reducing infectious disease spillovers, such as COVID-19. Relieving additional debt for each benchmark met would incentivize debtors to select projects that achieved multiple environmental benefits efficiently.

Today, governments, financial institutions, and development organizations have begun to accept that environmental protections and their consequences are not simply about the environment. They are also about jobs, climate stability and resilience, poverty reduction, clean and available water, public health, infectious disease control, and quality of life.

The timing is ripe for reforming and scaling debt-for-nature swaps to break the vicious downward cycle created by the debt, climate, and biodiversity crises. Many development finance institutions and international organizations have begun exploring the renewed use of nature swaps. They must go beyond incremental changes. Smart debt relief can allow nations to help themselves and fulfill their commitments to preserve our planet.