Debt-for-Nature Swap Market Faces Significant Headwinds as Economics Shift
The once-promising market for debt-for-nature swaps, designed to simultaneously reduce developing nations' debt burdens and fund environmental conservation, is encountering serious challenges. Bankers and consultants report that potential borrowers are hitting the brakes on these complex financial instruments.
Market Rally Undermines Financial Logic
With emerging-market bonds experiencing a substantial rally, the fundamental economics of these swaps are no longer compelling for many nations. Antonio Navarro, a managing partner at boutique credit fund ArtCap Strategies and former Credit Suisse banker, explains that "a lot" of deals initiated in the past year are being reconsidered or placed "on hold."
The mathematics simply doesn't work under current conditions, Navarro emphasizes, noting that yields on many emerging-market government bonds now approach or even fall below those of US Treasuries.
Structural Complexities and High Costs
These financial products, which involve swapping old, often distressed debt for new obligations with more favorable terms, require extensive preparatory work. This includes identifying appropriate projects, conducting scientific assessments, and securing guarantees from multilateral lenders—all processes that incur substantial fees.
Despite BloombergNEF estimating over $1 trillion of eligible debt as recently as May last year, only about $6 billion worth of deals involving private capital have been completed since 2021, according to BNEF data.
Growing Skepticism About Environmental Focus
Simultaneously, governments are expressing increasing dissatisfaction with the environmental emphasis that has traditionally characterized these deals. Public finance representatives, bankers, and lawyers involved in transactions report concerns that conservation goals—such as mangrove preservation—are sidelining more urgent local priorities like healthcare, education, and poverty alleviation.
Audrey Alevina of Gabon-based Alevina & Partners, which worked on her country's $500 million debt-for-nature swap in 2023, notes that many African governments have long held an "ambivalent" attitude toward conservation finance. Basic services like electricity, water, education, and healthcare remain critically deficient or entirely lacking in many regions, making them more immediate concerns.
Broader Shift in Development Priorities
This development reflects a wider recalibration in how environmental programs are perceived. Last year, billionaire philanthropist Bill Gates cautioned against allowing climate concerns to overshadow issues like healthcare in poorer communities. In a memo ahead of the COP30 summit, Gates advocated for "improving lives" as the paramount metric.
Andrew Dabalen, the World Bank's chief economist for Africa, identifies a key weakness: "concerns about country ownership." He argues that nature-based targets have often been driven by guarantors or non-government actors rather than governments themselves. For lasting value, Dabalen insists, "it has to be a government basically saying, 'This is our priority. This is where we want to invest the savings in.'"
Political Headwinds and Market Evolution
The market faces additional challenges from shifting political landscapes. The US International Development Finance Corporation (DFC), once a major player in debt-for-nature swaps, has signaled reluctance to engage in such deals since President Donald Trump returned to the White House, according to conservation officials.
Thomas Sberna of the International Union for Conservation of Nature notes that while the US "used to be a big player," these transactions are "not a priority" for the current administration. This has created a less favorable environment for the ambitious $5 billion in conservation-focused swaps Sberna had envisioned for eastern and southern Africa in late 2023.
Alternative Directions and Continued Interest
Meanwhile, swaps targeting non-environmental goals are gaining traction. Kenya and Benin are in discussions for development-focused swaps, while World Bank President Ajay Banga has indicated the institution is examining nine such transactions across Africa and Asia. Kenya completed a swap targeting food security in December with DFC assistance, and Angola's finance ministry is now planning swaps focused on health and education.
Despite current challenges, some market participants remain optimistic. Ramzi Issa, a former Credit Suisse banker instrumental in opening the debt-swap market to private capital, believes there's "plenty of room for growth." He argues these transactions can still help countries achieve fiscal goals like reducing refinancing risk, diversifying funding sources, or flattening repayment curves.
Jake Harper of Legal & General Investment Management cautions against generalizing across all emerging markets, noting that "there are, of course, different countries and different situations globally." He maintains that opportunities still exist to replace expensive private debt for some sovereigns.
Industry Adaptation and Forward Movement
Marisa Drew, chief sustainability officer at Standard Chartered, acknowledges criticism that nature-focused deals can be "very, very prescriptive" for borrowers. She explains that restrictive parameters ensure "the desired impacts are delivered."
Catherine Burns, managing director of The Nature Conservancy's investment unit NatureVest, expresses enthusiasm that debt swaps are now "providing an opportunity and model to achieve other types of benefits" beyond conservation. While acknowledging the need to work "a little bit differently and with some new stakeholders," she affirms the industry is "still moving forward."
The market, which began in the late 1980s with small deals lacking private investment, expanded significantly when Credit Suisse partnered with The Nature Conservancy in 2021 to bring private capital into the mix. Major banks including Bank of America, JPMorgan Chase, Standard Chartered, and UBS Group (which acquired Credit Suisse in 2023) have since arranged such transactions.
