Recapitalising Sovereign Debt

8 September 2020, 13:30:00

F4B have produced a new technical paper on the subject of Recapitalising Sovereign Debt.

COVID-19 and the linked economic downturn has put emerging countries and their economies on a pathway to a sovereign debt crisis.

Many of the affected countries are rich in biodiversity. Yet this key component of their “natural capital” is rapidly diminishing and under increasing threat. Nature loss – such as deforestation, draining of wetlands, and species extinction - has reached alarming levels and in a vicious cycle is being affected by, and is affecting, climate change.

There is a growing body of research making clear not only the link between nature and climate, and sovereign debt, but also how nature loss is eroding many nations’ capacity to generate the economic activity needed to service and repay sovereign debt.

Global biodiversity loss and nature destruction continues, posing ever-greater systemic risks if not addressed. Many developing countries, with a relative inability to address the risks of natural capital destruction, are most exposed. That creates a vicious cycle.

Finance for Biodiversity believes there is a compelling opportunity – indeed, an urgent need - to break this cycle by offering a sovereign debt instrument that links the cost of sovereign debt with success in protecting or enhancing a country’s natural capital, as part of debt restructuring.

“Nature Performance Bonds” (NPBs) would redefine new issuance and restructuring of existing sovereign debt around measurable economic, nature and climate outcomes by offering the issuer reductions in coupon payments and principal adjustment in return for the achievement of nature-based outcomes – such as restoring wetlands, protecting forests from encroachment and reducing threats to wildlife and plant species.

A diverse range of environmental, social and economic performance indicators could be used to monitor delivery of these outcomes.

NPBs would build on the recent evolution of state-contingent debt instruments and green finance products by ensuring that they are not only scalable but standardised, evolving the natural capital beyond the project-specific nature of much green finance so far, and making NPBs attractive to the private sector.

This year – 2020 - was to be a “super year” for global environmental action, given multiple commitments to halt biodiversity loss and climate change. With an accelerating set of climate initiatives in the run-up to the United Nations Convention on Biological Diversity (COP-15) meeting in Kunming, China, in May 2021, as well as and the UN Framework Convention on Climate Change (UNFCCC)’s COP26 climate conference in Glasgow, Scotland, in November, the time for action is now.

Download the full report here >