- NEWS -
New “nature performance bond” to tackle twin sovereign debt and biodiversity crises
30 September 2020, 07:00:00
Opportunity for creditors and developing countries to redefine new issuance and restructuring of existing sovereign debt around measurable nature and climate outcomes.
A new financial instrument developed by the Finance for Biodiversity Initiative (F4B) could help tackle a growing sovereign debt crisis in developing nations while protecting sensitive ecosystems and biodiversity.
The new instrument – known as a “nature performance bond” (NPB) – complements traditional debt instruments, which collect interest until a fixed maturation date, with a performance scheme focused on measurable economic, nature and climate outcomes. Under the terms of an NPB issuers receive relief on both interest and principal as they achieve agreed nature-based outcomes, such as protecting forests, restoring wetlands, and reducing threats to wildlife.
There would be no restriction on the use of proceeds, although a portion could be invested to achieve the committed nature performance outcomes.
“Historically, nations faced with looming financial crises have been forced into a corner -- either default, or lasting damage to their economies, biodiversity, and their people,” said Simon Zadek, Chair of F4B. “As key stakeholders convene for the United Nations Summit on Biodiversity, we hope to flip the script and make debt the driver of ecological conservation and human development, with the help of nature performance bonds.”
NPBs can help to solve the twin crises of swelling sovereign debt and rampant biodiversity loss by creating a bridge between providers of financial capital and biodiversity-rich countries most in need of debt relief. Many of these nations have seen a disproportionate impact from COVID-19 on their economies.
Seven of the 10 countries with the highest number of COVID-19 infections to date are developing economies that were already facing debt distress before the pandemic struck. Declines in local currencies have increased the cost of servicing foreign debt for many, while evaporating demand has robbed tourism- and export-dependent countries of income.
At the same time, many countries have dramatically increased public spending to support their health systems and defend their economies and citizens’ livelihoods. Emerging and developing countries have unveiled rescue packages worth 5.4% of their gross domestic product (GDP), according to the World Bank. This combination of factors has led to government budget deficits ballooning out of control.
Recent months have witnessed the emergence of a growing body of evidence and research making clear the link between nature, climate, and sovereign debt; and also how nature loss is eroding many nations’ capacity to generate the economic activity needed to service and repay sovereign debt.
Progress on achieving biodiversity targets under NPBs would be monitored and verified, to award appropriately debtors and to assure creditors that they are paying for actual performance.
The bonds would build on use so far in green finance markets of “debt-for-nature” swaps, a thriving market for green “use of proceeds” bonds, and early experiences in SDG-aligned bonds. NPBs are designed to allow for the standardisation that is typically critical for driving scale in capital markets, thus enhancing the attractiveness of such instruments to the private sector. Investors with long investment horizons (such as pension funds and sovereign wealth funds) could find NPBs attractive.
Zadek said: “Although work to secure multilateral agreements has slowed, we can still make this year a ‘super year’ for global environmental action by building nature into sovereign debt markets as a contribution to addressing biodiversity and climate challenges, while alleviating the economic pain of the pandemic in some of the world’s poorest countries.”