Ecuador’s Debt-for-Nature Swap: A Small Deal, powerful message

By Joaquin Martinez Alban

Amid a deep fiscal crisis, Ecuador received positive news: the closure of the Amazon Biocorridor Program debt-for-nature transaction. In May 2023, Ecuador finalized a conversion plan for ocean and maritime protection in Galápagos, making this the second transaction in two years. Through collaborative environmental policy-making, Ecuador establishes itself as an innovative actor in conservation policies, while simultaneously reducing its heavy sovereign debt burden.

Win-win solutions

The first proposals for debt-for-nature transactions date to the 1990s, devised as a mechanism to allow highly indebted countries to generate budget space for conservation, despite momentary debt crises. Initial proponents argued this mechanism was a win-win: governments reduce debt, environment NGOs guarantee conservation funding, the banks earn a fee underwriting the transaction, and the environment is firmly protected regardless of political instability.

Each transaction is unique, but most follow this basic structure: the issuing country joins an  NGO in creating a Special Purpose Vehicle that issues securities in international markets. A financial institution, in turn, underwrites the new issuance and sells the new bonds to investors, usually those investing in ESG fixed income. The SPV uses the raised capital to buy high-interest obligations at a discount and destines a portion for environmental conservation. Everyone wins in this market-based solution.

The Amazon Biocorridor Program is expected to generate fiscal savings between $700-800 million through 2035. Additionally, the transaction will generate $400 million guaranteed for environmental conservation ($23.5 million over 17 years) and a $4.5 million per year endowment capitalizing future requirements. In total, the transaction guarantees around $460 million for the conservation of 4.6 million hectares of protected rainforest and 1.8 million hectares of forest and wetlands ecosystems.

The role of environmental NGOs should not be understated in organizing these debt transactions. The Nature Conservancy (TNC) provided substantial technical and scientific expertise for the Amazon Biocorridor Program. As part of its Nature Bonds Program, TNC has successfully advised on six debt-for-nature programs (Seychelles 2016, Belize 2021, Barbados 2022, Gabon 2023, Bahamas 2024 and Ecuador 2024). This is the first land-based program for TNC. Compared to ocean programs, land-based transactions are more complex as they involve more species, more than one ecosystem, and interaction with local communities. Therefore, without a local, knowledgeable actor guaranteeing the on-site conservation efforts, the financial transaction itself would have little credibility in international financial markets.

The environment does not vote

Environmental conservation, although critically important, is politically unattractive. Candidates talk extensively about proposals for conservation, but when budget procedures are due, the environment is relegated. After all, the environment does not vote in elections. In contrast, debt-for-nature transactions allow highly indebted countries to guarantee environmental conservation funding in advance. Win-win scenario indeed.

Newer debt-for-nature transactions provide three key characteristics: (1) stability and transparency, (2) credit enhancement, and (3) real stakeholder engagement.

Slash-and-burn policymaking is characteristic of unstable economies. Politicians attempt to modify, rename, and rearrange programs and budgets. In contrast, debt-for-nature swaps re-prioritize conservation creating transparent Special Purpose Vehicles with international legal commitments for preservation. Capital allocation is clear and supervised by multiple parties, including mandatory disclosures. The legal structure blinds future governments from attempting to divert funds towards other political priorities.

Junk creditworthiness often impedes developing economies from international credit markets. To this effect, the newest swap announced includes a $1 billion risk insurance by the U.S. International Development Finance Corporation (DFC) and a $155 million partial liquidity guarantee by the InterAmerican Development Bank (IDB). While Ecuador’s sovereign bonds are considered junk status, the guarantees associated in this nature bond allow a 1.8% + Treasury rate interest. These credit enhancement mechanisms place new bonds at Aa2 ratings, the third highest Moody’s investment grade.

These debt-for-nature swaps require real stakeholder collaboration. Technical local experts propose the transaction, engaging with government, multilateral banks, international development institutions and financial intermediaries. Each actor involved in the process contributes specific know-how, contributing to a broader, meaningful policy. Good governance is secured. In the Amazon Biocorridor Program, the Board will have participation from The Nature Conservancy, different government agencies, indigenous communities leaders, and the production sectors.

The message

Debt-for-nature arrangements highlight the importance of collaboration in seeking scalable solutions to the most pressing environmental challenges. Looking ahead, more debt-for-nature transactions are expected. This pragmatic market-based approach to conservation efficiently provides budgetary space to invest in real, science-led approaches to conservation. Beyond mere politics, the approach is working.

Much more is to be done in this space. A report published in 2022 during COP-15 estimated the current biodiversity spending gap to be $700 billion per year. Ecuador’s recent transaction is only a small portion of this larger quest. However, it does send a powerful message to bigger countries and global financial markets: collaboration and innovative policy-making will work best in solving the world’s most complex environmental challenges.

Joaquin Martinez Alban is a current MIB student at The Fletcher School, Tufts University.