Can debt-for-nature swaps reduce global debt and environmental harm?

© Ben O’Bro

Key points

• Debt-for-nature swaps enable low-income countries to convert foreign debt into funds for critical environmental protection, decarbonisation and biodiversity conservation projects, potentially freeing up to US$100bn. Bolivia, the Philippines and Gabon are among those to have engaged in swaps.
• Widespread adoption requires moving beyond isolated negotiations to a systematic international practice. They also need to be part of a broader structural reform to address the inherited cycle of debt and structural imbalances faced by global south economies.
• The proposal is gaining significant traction, championed by political leaders. such as Colombian president Gustavo Petro who sees benefits for Amazon conservation and peacebuilding. It is also supported by major investors like Legal & General which has committed $1bn to the financing model.

Climate talks often end with the big question: how will we fund this? A simple and just answer is debt-for-nature swaps – a financial mechanism that exchanges a portion of external debt so countries (particularly low-income countries) can invest these freed resources in decarbonisation and the protection of forests, oceans and biodiversity.

This measure recognises that low-income countries around the world are unable to meet their environmental protection and social needs because a disproportionate share of their GDP is used to pay compound interest and debt, which ultimately goes to rich banks and organisations in the global north.

In Colombia, for instance, foreign external debt amounts to 50% of GDP. This debt pressure has led to budget cuts in key sectors such as health, education and environmental protection, and it puts pressure on the country to continue oil and coal extraction at the expense of human and environmental wellbeing.

In addition, according to data from Colombia’s finance ministry, 5% of GDP is used to pay debt interest, while only 0.12% goes to environment and sustainable development. When resources allocated to debt exceed those directed towards protecting the environment and fundamental human rights, something is wrong with the system.

It is estimated that debt swaps could free up to US$100bn, resources that can be used immediately to protect the environment. By reducing interest on debt payments, debt-for-nature swaps incorporate principles of climate and environmental justice, recognising that rich countries have a large responsibility for environmental degradation and should bear the costs of climate adaptation and mitigation. Indeed, a recent study estimates that by 2050, rich countries should pay impoverished countries $170tn to compensate for their responsibility in the climate crisis.

Debt-for-nature swaps gaining momentum

Debt-for-nature swaps have existed since the 1980s. Amid the Latin American debt crisis at the time, conservation group WWF proposed the mechanism as a way for indebted countries to address environmental challenges in exchange for debt relief. Since then, it has been implemented in countries including Bolivia, Ecuador, the Philippines, Gabon and Colombia.

Debt-for-nature swaps are also gaining attention among global south political leaders. One of the most vocal has been Colombian president Gustavo Petro. He highlights that for countries like his own, opening fiscal space to invest in Amazon conservation is an opportunity that contributes not only to environmental regeneration, but also to peacebuilding.

Petro seeks to implement swaps to support financing for the three main axes of the peace agreement which ended decades of civil war: agrarian reform, territorial inclusion, and the truth, justice and reparation system. According to the president, resources for peace and equity-building would be complemented by $2.5bn-per-year for Amazon conservation.

Debt-for-nature swaps are an attractive instrument not only for global south countries but also for investors. In February, the largest asset manager in the UK, Legal & General, committed $1bn to become a key investor in debt-for-nature projects. This fund has already backed swaps in Ecuador’s Galapagos Islands, as well as in Belize and Gabon.

Making swaps systemic and fair

Despite their potential, debt-for-nature swaps face several challenges.

One is making the mechanism systematic within the international financial system, rather than isolated negotiations conducted on a case-by-case basis. Individual deals will not yield significant impacts on debt relief. As former Colombian finance minister Diego Guevara said: “Countries in the global south must work together to advance in a new international financial architecture.Debt relief must be part of this discussion, as peripheral economies cannot unilaterally request relief without triggering immediate market penalties.”

A second challenge is implementing them in ways that do not jeopardise local autonomy or turn nature into a commodity. Two leading research centres in Colombia studied debt-for-nature swaps and documented how this instrument can imply a loss of sovereignty for debtor countries, as key environmental decisions may become subordinated to payment commitments negotiated with international organisations or countries.

For instance, in Colombia two debt-for-nature swaps have been implemented, but there was limited involvement of local communities in negotiations, and there is limited information available regarding their operation and results. Tools such as the debt-for-nature conversion practice standards and the Nature Bonds Toolkit, published by the Debt for Nature Coalition, can play an important role in setting guidelines and minimum standards for implementation.

The third – and most important – challenge surrounding debt-for-nature swaps is recognising that implementing this instrument does not eliminate the need for structural reform of the international financial system. As Guevara put it, “debt relief must be part of the discussion on a new international financial architecture, because peripheral economies cannot unilaterally request relief without triggering immediate market penalties. Debt relief should be recognised as part of a global commitment to safeguarding the planet’s lungs.”

In this context, it is essential to challenge the cycle of indebtedness faced by global south countries – often a result of colonial, inherited imbalances of power – and to question the legitimacy of debt itself. Scholars such as Jason Hickel, for instance, argue that debt acquired by undemocratic leaders should not be recognised. Others advocate for eliminating debt incurred as a result of emergencies such as the Covid-19 pandemic.

The climate crisis we face may be an opportunity to question the extractive and unequal international financial system imposed by the global north. This system was created through political and economic decisions, and for the same reason it can be rebuilt through political and economic choices to be fairer for both nature, affected communities and the relationships between societies – if we choose to act.

Written by

Allison Benson is an economist, PhD from the London School of Economics. She is executive director of the Public Action research center, leading work in policy research, community participation and narrative change.