The transaction is the first debt conversion for nature to focus funding on terrestrial and freshwater conservation rather than on marine environments.
A new debt conversion to free up nature funding in Ecuador is expected to generate around $460m (€444m) of funding for conservation in the Amazon basin over the next 17 years. It is the latest in a clutch of similar transactions to be signed off in recent months and the largest such transaction to date in terms of the nature funding.
The debt conversion transaction – also referred to as a debt-for-nature swap – is the world’s first to cover terrestrial and freshwater conservation, with earlier structures typically having been more focused on marine conservation including another transaction for Ecuador In 2023 to fund conservation in the Galapagos Islands.
Funding from the latest deal will support the implementation of Ecuador’s Amazon Biocorridor Programme, which sets out to conserve the Ecuadorian Amazon region through improved management of 4.6 million hectares of existing protected areas and the protection of an additional 1.8 million hectares of forests and wetlands. The programme is also intended to protect 18,000km of rivers, improve climate resilience, as well as benefitting indigenous populations and communities.
Debt-for-nature swaps generate funds for nature conservation usually by facilitating the buyback of existing debt by the host country, which is then replaced by cheaper borrowing. This frees up financing for climate measures and nature conservation under terms agreed between a country and its international partners.
In this case, the debt conversion refinanced some $1.53bn of Ecuador’s international bonds, supported by investment from international institutions via the Nature Bonds Programme of The Nature Conservancy (TNC), a US-based NGO. TNC’s nature bonds used to be known as blue bonds but have been re-badged to reflect the widening scope of such funding beyond marine environments.
The new financing was backed by $1bn of risk insurance from the US International Development Finance Corporation (DFC), and a $155m partial credit liquidity guarantee from the Inter-American Development Bank (IDB). The deal was arranged by the Bank of America.
The transaction is expected to generate $400m plus an estimated $60m in returns on a linked endowment. This will underpin $19m a year of funding for the programme over 17 years, including technical support from the TNC.
Performance measurement
Slav Gatchev, managing director, sustainable debt at TNC, told Impact investor that the organisation’s support added value to the transaction and would help ensure the programme was implemented successfully.
“Our Nature Bonds programme is not just about the financial transaction. The transaction is the starting point for long-term engagement with the government as a technical advisor, in this case, for the next 17 years and beyond,” he said.
As part of the legal agreements, including that for the $19m a year of funding, the government committed to achieving time-bound, measurable milestones on the way to meeting its goals.
“There is a mechanism for TNC to monitor that performance and report on it. Both conservation commitments and conservation funding obligations are legally binding,” Gatchev said.
Much of the conservation funding will be made via grants from a new independent conservation trust fund, the Amazon Biocorridor Fund. This will be run by a local board of directors, including representatives from the government, indigenous groups, local communities, academia, and the financial, sustainable development, and production sectors, as well as TNC.
TNC said it would “follow international standards for conservation trust funds to ensure transparency and accountability, adopting clear procedures for identifying grantees and issuing public reports annually, including independent audit reports”.
Growing interest
The project is the sixth to be supported by TNC’s Nature Bonds Programme, following others for the Seychelles, Belize, Barbados, Gabon and The Bahamas. These have generated conservation funding the TNC estimates at around $1bn.
The pool of similar debt conversions for nature has been growing over recent months.
“Now we are also seeing a see a lot of interest and participation by other NGOs and other groups in this theme. This year alone, we will have seen potentially five major debt conversions,” Gatchev said.
Those include a new climate resilience-related swap for Barbados involving the Green Climate Fund and IDB, a debt-for-nature transaction under which JP Morgan helped El Salvador restructure $1bn debt to free up funds for river watershed management, as well as TNC’s Ecuador and Bahamas transactions. Meanwhile, the World Bank has just announced details of a debt-for-development swap it is carrying out with Côte d’Ivoire.
Gatchev hopes that a coalition of six international conservation groups launched at October’s COP16 biodiversity summit in Colombia to promote cooperation on debt conversions for nature will add further momentum to the sector.
He said the large scale of the Ecuador transaction reflected not just the size and complexity of the conservation programme being funded, but also the financing environment. Ecuador has a large amount of pre-existing debt available for rescheduling compared to smaller economies such as Barbados or Belize, while the availability of large-scale political risk insurance from the DFC combined with IDB partial guarantees made the transaction attractive for investors.
Investor reassurance
Jake Harper, senior investment manager, private credit at Legal & General Asset Management (L&G) supports this view. L&G has invested in several transactions, and was one of the largest investors in both of Ecuador’s debt conversions for nature.
Harper said positive outcomes for biodiversity and nature from previous transactions, such as that for Belize, coupled with the “compelling returns for the product”, have been encouraging. He said support from organisations such as the IDB made a significant difference.
“Structures like this, where there are guarantees, are a great way to get exposure to emerging markets. Knowing you have a triple A-rated entity, which is focused on development of Latin America and the Caribbean, and providing liquidity, removes some of the nervousness around emerging markets and helps to bring a greater number and diversity of investors into the structure,” he said.
Debt conversions for nature have attracted criticism in some quarters for being complex transactions that are more costly for lenders than providing straight loans. However, they also provide heavily-indebted governments with nature funding without requiring an increase in that debt.
“With green bonds and other ‘labelled’ sovereign issuances, 99 times out of 100, those imply the country borrowing more, adding to their indebtedness, which the lower rated countries in the Global South can’t afford,” Gatchev said.
The $1bn generated by the TNC’s transactions in its six geographies was “neutral or better in terms of creating fiscal space and providing liability management advantages, while at the same time unlocking funding, which otherwise either wouldn’t have happened, or would have required the country to borrow more against it”, he added.
