International Development Committee inquiry into debt-relief in low-income countries

Call for Evidence: The Nature Conservancy’s submission

17th June 2022

The Nature Conservancy (TNC) is the world’s largest conservation organisation currently working in over 70 countries with a mission to conserve the lands and waters upon which all life depends. With offices in London, Brussels and Berlin, TNC in Europe works collaboratively with public and private sector institutions to leverage science, policy, finance and proven field work to drive large scale and lasting conservation impact not only in Europe but also in Asia and the Pacific, Africa, the Caribbean, Latin America and North America.
One of TNC’s strengths is our considerable in-house expertise in international financing, including debt -for-nature swaps, and understanding how financial markets operate, including “NatureVest”, our in-house impact investing team, which has helped TNC and our partners originate, structure, fund and close investment vehicles representing more than USD 2.3 billion of committed capital for climate and biodiversity causes.
As the threat of climate change and awareness of the role that natural resources and biodiversity play in economic growth rapidly increase, most developing countries will require additional financing for conservation to address climate and nature related risks. As of May 31, 2022 , the International Monetary Fund (IMF) List of LIC DSAs for PRGT-Eligible Countries identifies 32 out of 69 low income countries at high risk of or in debt distress, a number that is likely to exacerbate amidst rapidly increasing energy and food prices and rising interest rates globally.
TNC firmly believes, and our work demonstrates, that by changing the practices of global institutions like the IMF, the Paris Club of sovereign creditors, the G20 and G7, there is an opportunity to transform the USD 9 trillion dollar developing country sovereign debt market into a vehicle to accelerate the transition to low-carbon, nature-positive economies that deliver sustainable and long-term prosperity to communities across the developing world.
This transformation can be achieved if global debt sustainability institutions routinely employ principles that incorporate nature-positive and carbon-neutral policy frameworks. These principles should operate alongside traditional macroeconomic policies, in debt sustainability analysis and in debt refinancing, in restructuring and forgiveness operations in low and middle income countries.
Changing the practices of global institutions in this manner will broaden the understanding of sustainable debt to recognize that strong economies and the wellbeing of people is predicated on a stable climate and healthy nature – and that these outcomes, in addition to fiscal and monetary measures, are therefore critical to a country’s ability to service its debt and provide for its citizens.
To paint a picture of what that impact would mean on climate, nature, people and communities specifically, we will briefly describe two examples of ‘debt-for-nature' transactions executed in the Seychelles and in Belize by TNC’s “Blue Bonds for Ocean Conservation Strategy”.
The Strategy works with countries to refinance a portion of their national debt to reduce their debt burden, use the savings to secure funding for conservation activities, and allow countries to achieve their conservation goals. It consists of multiple, integrated parts:

TNC works with countries to identify their conservation commitment goals including a timebound plan to put 30% of its ocean areas, including coral reefs, seagrass beds, mangroves, and other important marine habitats, under protection.
TNC arranges the debt conversion, supported by multilateral and/or bilateral development institutions credit enhancement mechanisms, that refinances debt on better terms generating savings that convert into conservation finance.
TNC helps countries to create a Marine Spatial Plan working with stakeholders to identify activities that combine conservation and sustainable economic opportunities..
TNC works with local stakeholders to lead the design and establishment of an independent Conservation Fund to disburse the funding to conservation partners and programs.

In November 2021, TNC and the Government of Belize (Belize) announced the completion of a USD 364 million debt conversion for marine conservation that reduced Belize’s debt by 12 percent of Gross Domestic Product (GDP), created long-term sustainable financing for conservation, and locked in the government’s commitment to protect 30% of Belize’s ocean, in addition to a range of other conservation measures. The transaction is the world’s largest debt refinancing for ocean conservation to date.
The debt conversion enabled Belize to repurchase USD 553 million, a quarter of the country’s total public debt, from bondholders at a 45% discount through a “Blue Loan” arranged by TNC. The “debt conversion” resulted in a USD 189 million reduction in principal outstanding. The savings achieved in the refinancing allowed Belize to create an estimated USD 180 million in conservation funding over 20 years, composed of annual cashflows from the government and an endowment capitalized through the Blue Loan.
As part of the transaction, Belize committed to ocean conservation undertakings to place 30% of its ocean, including parts of the Mesoamerican Reef, under protection by 2026, using a transparent, participatory Marine Spatial Planning process, and establishing an independent Conservation Fund to allocate the conservation funding to in-country partners.
The Belize economy is heavily dependent on tourism and much of the tourism, as well as other key sectors of the economy, depends on the ocean. The economy was hard hit by the Covid-19 global slowdown, its GDP contracting by 16.7% in 2020. The Marine Spatial Plan will sustainably support the country’s economy while protecting marine habitats.
The conservation flows, which absent the transaction, would have been paid to external creditors in USD, will be paid in local currency and recirculated back into the local economy creating much needed economic stimulus.
The financial transaction was arranged by NatureVest, TNC’s impact investment unit, in support of TNC’s Blue Bonds for Ocean Conservation strategy. Credit Suisse arranged and financed the Blue Bond. The structure was credit enhanced by the United States International Development Finance Corporation (DFC)
The transaction incorporated a commercial parametric insurance policy to mitigate the financial impact of natural disasters. The Belize economy is highly exposed to economic slowdown and reduced government revenues resulting from hurricanes and large storms. The world’s first commercial sovereign debt catastrophe insurance policy provided coverage for a Blue Loan debt payment (coupon and principal) following an eligible hurricane event in Belize. The payment can be triggered in several ways: 1) based on the intensity of the hurricane (minimum of Category 3) and proximity to economic hubs—meaning larger storms can be further away and still trigger payment; 2) the occurrence of two hurricanes of any intensity in the same 12-month period; or, 3) a hurricane of any intensity accompanied by very heavy rainfall. The policy was designed by Willis Towers & Watson and underwritten by a subsidiary of Munich Re. The initial insurance policy covers up to May 2024 (and is expected to be rolled forward over time).
In 2016, TNC announced a debt-for-nature restructuring with the Government of Seychelles and its Paris Club creditors (including the United Kingdom), designed to help the Government re-direct a portion of its debt payments towards marine conservation and climate adaptation. The conversion used a combination of $15.2 million of impact capital and $5 million of grants to buy back a portion of the Seychelles’ debt at a discount. The cash flow from the restructured debt was payable to and managed by an independent, nationally based, public-private trust fund. A Marine Spatial Plan was designed to protect Seychelles’ ecological assets but also to allow its “Blue Economy” — businesses that rely on ocean resources — to continue in a sustainable manner for generations to come.
On March 2020, Seychelles announced the final details for Marine Protection Areas to reach its goal to protect 30 percent of its ocean, an area larger than the size of Germany, as committed in the debt conversion, an increase from just 0.04 percent at the time of the debt transaction.
These transactions, one refinancing commercial debt at scale in Belize’s example, and refinancing bilateral debt as in the Seychelles example, offer replicable models for achieving conservation and climate outputs and generating sustainable conservation funding at scale. Success requires three key ingredients:

Countries committed to achieving the conservation outcomes
Availability of debt to refinance: this can be bilateral or commercial; bonds, loans and other liabilities; foreign or domestic debt. There is always the opportunity to refinance debt with lower coupons and longer tenors to create significant funding for conservation and not exclusively for countries threatened by high debt distress.
Availability and affordability of credit enhancement and other risk mitigation products (e.g., credit guarantees) typically provided by multilateral and bilateral development finance institutions to enable debt savings and the creation of a cashflow of conservation funds as well as to support more deals in more markets.

TNC’s Blue Bonds model presents a set of principles (essentially, debt refinancing in exchange for climate and conservation predictable long-term funding and commitments) which can be applied in a variety of scenarios, such as land conservation or mixed land and marine conservation commitments, while helping to reframe the global discourse on debt sustainability.
The UK Government has the opportunity to lead and influence key actors (such as the G7 group, the Paris Club of creditors, the IMF and other influential sovereign debt fora) to ensure that debt conversions and debt forgiveness operations explicitly secure climate and biodiversity commitments, funding and economic and social benefits.
The UK Government can advocate a position to incorporate climate and nature risk and outcomes, alongside macroeconomic sustainability, into debt sustainability considerations and operations into IMF, G7 and G20 negotiations on the future of the Debt Service Suspension Initiative (DSSI), Common Framework and other debt restructuring efforts.
It would be timely for the UK Government to consider within its bilateral debt operations the expansion of debt conversions and debt forgiveness transactions that explicitly secure climate and biodiversity benefits.
The UK Government can explore with its national development institutions, as well as with multilateral development banks and other international finance mechanisms, how those institutions can better support, through guarantees and other risk insurance mechanisms, debt conversions and forgiveness operations that incorporate climate and nature..
The UK financial sector, in its role as commercial creditor, and as the need for commercial sovereign debt restructuring in low and middle income countries increases, has the opportunity to advocate for and seek to incorporate nature and climate funding, commitments and outcomes in debt operations.
The UK financial sector, in particular investment banks in collaboration with the UK insurance industry, have the opportunity to incorporate commercial natural catastrophe insurance when arranging sovereign debt issuances for low and middle-income countries, and explore embedding other insurance mechanisms, such as natural infrastructure insurance to preserve nature and climate outcomes (see Insuring Nature to Ensure a Resilient Future).
In summary, TNC believes that the UK, as a global leader in climate and biodiversity action, can seize this timely opportunity to demonstrate its world-class policy leadership by developing a policy framework for the expansion of debt conversions and debt forgiveness operations that explicitly secure climate and biodiversity benefits within its bilateral debt operations and beyond. We, at TNC, stand ready to support HMG in further informing consideration of this proposal.
For further details or to arrange presentation of oral evidence to the Committee, please contact either:

Noor Yafai, Europe Director Global Policy & Institutional Partnerships

Email: noor.yafai@TNC.ORG

Beatriz Merino, Director Development Finance Institutions Europe & NatureVest

Email: beatriz.merino@TNC.ORG