Exclusive-World’s top MDBs to launch debt-for-nature swap ‘task force’ – sources

By Marc Jones

LONDON (Reuters) -The world’s top multilateral development banks are set to launch a global “task force” at the COP28 climate summit in the coming days to scale up the number and size of ‘debt-for-nature’ swaps that countries can do, four sources told Reuters.

Debt-for-nature swaps, where a developing country’s debt is cut in return for protecting vital ecosystems, are attracting growing interest following a number of successful examples in places such as Belize and the Galapagos (NASDAQ:) Islands.

The task force creation is the most significant step so far in showing that the global club of multilateral lenders, which between them have trillions of dollars worth of firepower, will significantly ramp up their support for these deals.

Four sources involved in the plans, which are expected to be announced at the COP summit’s ‘finance day’ on Monday, say the group will formally be called the “Task Force on Sustainability-linked Sovereign Financing for Nature and Climate”.

It will initially be chaired by the Inter-American Development Bank (IDB) and U.S. government’s Development Finance Institution (DFC), said three of the sources with direct knowledge of the matter. Both lenders have been involved in all the recent swaps which have also included Barbados and Gabon.

Institutions have until Friday to confirm they will join, but those expected to do so include the World Bank, European Investment Bank (EIB), African Development Bank (AfDB), Asian Development Bank (ADB), the Beijing-headquarted Asian Infrastructure Development Bank and a number of others, the sources added.

None of the banks would confirm their membership when asked by Reuters, but all have made pledges in recent weeks and months to ramp up their environmental efforts.

MDBs play a particularly important role in debt-for-nature swaps because they provide the credit guarantees and/or political risk insurance that make them viable.

At their simplest, the swaps work by buying up a country’s bonds, often at a discount, and then replacing them with cheaper eco-labelled ones that come with the special MDB guarantees.

Those enhancements make them less of a default risk in the eyes of investors and therefore drive down their cost. Some of the savings – although not necessarily all, critics note – are then funnelled towards conservation of barrier reefs or rainforests vital in the fight against climate change and biodiversity loss.

MAJOR MILESTONE

The new task force is expected to start work early next year and will initially focus on a “stock take” of the deals done so far as well as the “toolkit” countries and multilaterals need when they undertake a swap.

The Nature Conservancy, a U.S.-based NGO that has been involved in many of the recent deals, estimates a third of the $2.2 trillion worth of emerging market sovereign debt globally, or as much as $800 billion, is potentially “ripe” for swapping.

Countries seen as prime candidates include Sri Lanka and Zambia, which are both in the process of debt restructurings, as well as Kenya, Tanzania, Colombia and a number of other Amazon (NASDAQ:) countries.

If the MDBs can work together to provide the right guarantees, officials are optimistic some of these deals could be as big as $10 billion, 10 times larger than this year’s record $1 billion deal by Ecuador for its Galapagos Islands.

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