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Embedding Nature in Financial Instruments that Respond to the Sovereign Debt Crisis

Innovative Financial Instruments: Aligning Capital Markets with Environmental Outcomes

Executive Summary

Two out of five low-income countries were nearing unsustainable debt positions prior to the COVID-19 pandemic.[1] Global efforts to drive down COVID-19 transmission rates by restricting local activity, has affected crucial sectors such as tourism and international trade, and exacerbated already near unsustainable debt positions in developing markets. The potential scale of this issue has sparked initial international responses, such as partial debt service suspensions for 76 developing countries through the World Bank’s International Development Association and IMF debt service relief to 25 of the least developed countries.[2]

However, these solutions only offer short-term support and long-term debt sustainability issues are likely to become evident as this support is withdrawn. New debt issuance responses create a debt relief cycle that is self-defeating, with costs of capital being driven too high. For example, Angola, Mozambique, The Republic of Congo and Zambia now have debt burdens of over 100% of GDP and the average debt burden across emerging markets in Europe, The Middle East and Africa is now at 63.5% of GDP compared to 51.8% in 2019.[3]

Concerted policy action and financial product innovation is needed to avoid a widespread sovereign debt crisis. The importance of innovative sustainable finance solutions - such as, nature-performance-bonds, debt-for-nature-swaps and nature and climate sovereign bond facilities - has been emphasized by various international research bodies. These multi-purpose tools are capable of supporting a green COVID-19 recovery while responding to the debt, biodiversity and climate crises.[4]

Sustainable Debt Innovation

The challenge of responding to an impendent debt crisis also provides a platform for innovation, impact and improvement. It is imperative that institutions and individuals with relevant capacity take ownership over this opportunity to generate requisite solutions.

These should respond to the debt challenges and go further to exploit the opportunity for sustained market improvement.

Global focus has been concentrated on the immediate threat that COVID-19 poses, however the greater threats of climate change and ecosystem degradation continue. Market innovation has assumed a level of responsibility for environmental impact, exemplified by the numerous asset classes which now assess and promote performance against environmental, social and governance metrics.

Figure 1: Bloomberg NEF, Global Sustainable

Debt Issuance, 2021.

In debt capital markets, corporates now issue bonds with pricing specifically tied to, for example, renewable energy targets and outcomes. Italian utility Enel issued a “sustainability linked bond” in 2019 that pays out a variable coupon (interest rate) dependent on whether the group meets its renewable energy targets. If targets are not achieved then a step-up mechanism is applied, increasing the interest rate, incentivising renewable energy target attainment. This indicates the private sector’s recognition of climate risk as both an investment risk and opportunity. Further, the insurance and re-insurance markets are increasingly developing their ability to value climate and nature related risk - resulting in broader expertise and understanding of related costs across the ecosystem.

Unfortunately, progress has not been evenly distributed across markets - innovation in sovereign debt markets in particular has been inadequate. There has been limited issuance of sovereign green bonds and no meaningful replication of proven concepts within the private sector - such as debt issuance linking coupons (interest rate) to performance against environmental or social metrics.

Since the global financial crisis of 2008, the primary proponents of financial market innovation have changed. Previously, the domain of investment banks, the pool of actors positioned to innovate and drive progress, has expanded to include central bankers and public sector stakeholders (e.g., government finance ministries). It is crucial that these stakeholders collaborate and drive forward this agenda within their respective sectors.

Sovereign Debt Innovation

Nature Performance Bonds

Linking new sovereign debt issuance and refinancing to nature and climate performance is a mechanism that would bring countries closer to nature and climate objectives while delivering value for citizens and breaking the undesirable cycle of debt and debt servicing, characteristic of conventional debt issuance. BwB have been working with Finance for Biodiversity (“F4B”) on this topic, creating an effective instrument through collaboration with relevant national governments, testing the market for product viability.

Figure 2: BwB, Nature Performance Bond: A Link to Sovereign Debt Repayment Terms, 2021.

In practice, this would work as follows:

A developing or emerging market country issues debt (borrows money), the large majority of which is for general economic purposes (general purpose), allowing it to meet government objectives for development and the needs of its citizens. The remainder being applied to a nature-based priority.

The new debt issuance (the money borrowed) is borrowed with an adjustment mechanism attached to it, that alters - either or both - the coupon (interest rate) and principal (the amount of money borrowed, to be repaid). This adjustment mechanism would depend on the country’s ability to meet pre-defined nature or climate targets in line with verifiable internationally accepted standards. If the country is successful, it would pay a lower coupon (interest rate) on the debt issued (money borrowed) and/or see a reduction in the principal (the outstanding sum borrowed, to be repaid) meaning a lower total debt service cost Consequently, funds recovered will be invested into initiatives with verifiable socio-environmental metrics, that evidence positive nature and climate outcomes.

Figure 3: BwB, Illustrative Example of a Nature Performance Bond in Numbers, 2021.

This would create a meaningful financial incentive for the debtor to deliver on its nature or environmental protection targets. The adjustment mechanism would incentivise issuing countries to improve socio-environmental conditions, defined in measurable, verifiable outcomes. These could range from the designation of protected areas to reduced deforestation rates.

Figure 4: BwB, Illustrative Example of a Nature Performance Bond vs a Vanilla Bond, 2021

Figure 5: BwB, Performance Bond: Measurable Biodiversity Impact, 2021.

Private sector involvement in NPBs is crucial to ensure scale and liquidity. The private sector is a key investor in sovereign debt markets. The challenge is to ensure that NPBs are also financially attractive to private sector participants. There are a number of approaches to this involving the use of credit insurance and risk mitigation. In addition, outcome funders could fund the principal adjustment and any coupon discount. There is a potential role for a multilateral facility involvement in this respect.

Figure 6: BwB, Nature Performance Bonds for the Private Sector, 2021.

Debt for Nature Swaps

We are also currently working with the MAVA Foundation, the International Institute for Economic Development, the International Union for Conservation of Nature and UNECA West Africa regional office to design innovative finance instruments that stimulate positive nature and climate outcomes, while resolving sovereign debt issues. This work is exploratory and has a strong research and development focus, responding to the unique circumstances of each country in consideration. We are assessing a range of financial products to ascertain which would be most suitable in each context.

For example, we are analysing the viability of tailoring debt-for-nature-swaps in these cases. This instrument could conceivably respond to the triple crisis of biodiversity loss, climate change and debt in developing countries. Further, they have the potential to scale, aided by budget support with appropriate fiduciary safeguards. Creditors would be needed to provide relief into the debtor government budget directly when pre-determined, verifiable climate and biodiversity targets are met.

COVID-19 support could also be factored into the design of these instruments. Financial innovation could therefore create a mechanism for COVID-19 support and debt relief that stimulates positive climate and nature outcomes. Such instruments could provide the driving force to support a green and inclusive COVID-19 recovery.

In well selected country contexts, this upscaled budget approach has three main impacts:

1. Increases to the size of funds being swapped

2. Increased government ownership and commitment

3. Increased accountability and transparency of the nature and climate targets to national citizens through the budget process

The net effect of these three impacts, is a greater effect on nature, climate and SDG outcomes such as increased protected areas, reduced deforestation, increased climate resilience and sustainable natural resource management.

By pioneering this mechanism in collaboration with our project partners, our objective is to provide a roadmap for scalable debt-relief solutions for widespread replication. We aim to co-ordinate further engagement with multilateral organisations including the World Bank, IMF and G20 to ensure that best practices are disseminated effectively.

Closing Thoughts

The world needs cross-sector leadership to tackle the interrelated crises of nature loss, climate change and COVID-19. The science is clear on the links between expanding deforestation, surging carbon emissions and increased human contact with wildlife viruses. Further, there is a looming financial crisis that could break out from the sovereign debt market and equally spread across the globe. Leaders can use finance as a mechanism to simultaneously respond to each of these issues.

As ever in capital markets, leadership equals innovation and opportunity capitalisation. The winners will be those that tailor their products to match the scale of the crises we face now and into the future. If these products simultaneously resolve these crises, the leaders will be far more than financial winners.

BwB has proven experience developing nature-based finance instruments which function effectively in markets, not theory. It is clear that to resolve the complex crises of our time, a broad range of stakeholders need to work collaboratively to design new solutions. We are actively innovating in new areas and are eager to form new partnerships to develop new solutions to be scaled and replicated. As a not-for-profit, BwB openly develops and shares intellectual property that can benefit consortium partners and wider networks, to maximise positive impact on the environment and social progress. The debt crisis is not an easy fix. BwB is eager to continue working with partners to apply cutting edge thinking to the issue, pioneering solutions that alleviate debt burdens while promoting positive nature and climate outcomes.

About BwB

BwB is a not-for-profit, finance innovation organisation powered by former investment bankers to assist high impact projects that benefit the environment and social good.

BwB works with governments, institutions, cities and foundations to provide advisory and research services to mobilise capital. BwB applies financial concepts and structuring to public projects to align them with the investment needs of capital markets, thinking about risk reduction, scaling and generation of financial returns alongside broader positive co-benefits and impacts. To learn more about BwB, visit


The information and opinions expressed in this publication were produced by Bankers without Boundaries, hereafter referred to as “BwB,” as of the date of writing and subject to change without notice. This publication is intended for information purposes only and does not constitute an offer or an invitation by, or on behalf of, BwB to make any investments. Opinions and comments of the authors reflect their current views, but not necessarily that of other group entities or third parties. Services or products mentioned in this publication may not be suitable for all recipients and may not be available in all countries. Persons interested in these products and services are kindly requested to contact BwB in order to be informed about the services and products available in a specific country.

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Although the information and data herein are obtained from sources believed to be reliable, no representation is made that the information is accurate or complete. BwB and its affiliated companies do not accept liability for any loss arising from the use of this publication. This publication may only be distributed in countries where its distribution is legally permitted.

[1] Center for Global Development, ‘Restructuring Sovereign Debt to Private Creditors in Poor Countries: What’s Broken?’, 2020. [2] United Nations Department of Economics and Social Affairs, ‘UN/DESA Policy Brief #72: COVID-19 and sovereign debt’, 2020. [3] Reuters, ‘Analysis: Is the ‘free ride’ over for poor countries’ bond holders?’, 2021. [4] Finance for Biodiversity, “Call for ‘bond facility’ to get double dividend in tackling the twin crises of sovereign debt and nature”, 2021; Finance for Biodiversity, ‘Greening Sovereign Debt: New Paper: Building a Nature and Climate Sovereign Bond Facility’, 2021. World Wide Fund for Nature, ‘WWF UK Response to the Dasgupta Review’, 2021; Finance for Biodiversity, ‘F4B Projects: Greening Sovereign Debt’ (; Green Economy Coalition, ‘How debt for climate and nature swaps can support a green recovery’, 2021; Green Belt and Road Initiative Center, ‘Debt-For-Nature Swaps: A Triple-Win Solution for Debt Sustainability and Biodiversity Finance in the Belt and Road Initiative (BRI)?’, 2021.


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