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Debt Relief or Just Greenwashing?

Tackling debt burdens and climate goals together is not always ideal

Cape Verde


CAN LIABILITIES be traded for an asset? Sometimes they can. A few weeks ago, Portugal reached a financial agreement with Cape Verde, the West African country that was once one of its colonies. Portugal will forgo €12 million in yearly repayments of Cape Verde’s €150 million of long-term debt. The money will instead be invested in clean-energy transition, climate adaptation and nature protection on the Cape Verdean archipelago.

Such deals are called debt-for-nature swaps. They can turn local financial liabilities into global environmental assets if properly executed. ‘Climate change is a challenge that takes place on a global scale,’ said Portuguese prime minister António Costa during his state visit to Cape Verde, adding: ‘And no country will be sustainable if all countries are not sustainable.’ 

It’s a very good point, as it addresses the twin problems of poorer countries’ indebtedness and the climate crisis hitting hardest the least responsible populations. According to the International Monetary Fund, ‘34 of the 59 developing economies most vulnerable to climate change are also at risk of fiscal crises’, with the burden getting worse as interest rates significantly increase.

Cape Verde is already facing environmental troubles, including coastal erosion and biodiversity loss due to rising sea levels and increasing ocean acidity. Any effort to decarbonise its economy will contribute, albeit by not very much, to global mitigation. Portugal, meanwhile, is providing debt relief for a country towards which it has a residual responsibility, and is helping to protect and improve the Cape Verde environment. A win-win situation, you would think.

Debt-for-nature swaps are nothing new. They were conceived in the 1980s by Thomas Lovejoy of the World Wildlife Fund in the wake of Latin America’s debt crisis. The first swap was pioneered by Bolivia and Conservation International, a US NGO. After that, several countries successfully followed, basically replacing expensive bonds or loans with cheaper financing through a number of different financial agreements. Then, for more than 20 years, the practice fell out of favour. It’s currently enjoying a resurgence for two main reasons: the unsustainable debt on the shoulders of the least-developed economies and the new fashion for ‘sustainable investing’. The buzz term is ESG (environmental, social and governance), metrics that track a company’s behaviour to provide information for nature-conscious investors. With the ranks of such investors growing rapidly, the entire finance industry is scrambling for ‘green’ and ‘blue’ bonds (blue as in the ocean) or other similar investment opportunities. There will be no shortage of them: the UN Biodiversity Summit in Montreal ended with the multilateral pledge to protect 30 per cent of the Earth’s land and seas by 2030 – an endeavour that’s always going to be in desperate need of money.

However, as reported by Bloomberg, a recent Barclays note to clients warns: ‘A debt-for-nature swap is, at first glance, a win-win solution. However, tackling debt burdens and climate goals together is not always ideal.’ 

There are growing doubts about how much of such deals actually goes into nature conservation and how much into the pockets of intermediaries such as insurers, consultants and credit providers. 

‘There is also a real risk of greenwashing, especially if funds to repurchase debt are supplied by a third-party funding itself via ESG-labelled bonds,’ the Barclays’ analysts admonish.

In general, climate finance could be in better shape. Let’s take the case of Portugal. Its government is well aware of the global environmental crisis. The country ditched coal usage in 2021, several years ahead of schedule, and now gets 60 per cent of its electricity from renewable sources, aiming to reach 80 per cent by 2026. It has agreed to swap its credits to help Cape Verde improve its environment. However, at the same time, Portugal is falling far short in its contributions to the desperately needed US$100 billion-a-year fund to help poorer economies face the climate crisis, just as many other rich countries are. 

Climate change is the ultimate, inescapable liability we all face, and it can’t be traded away. It calls for hard cash and effective, thoroughly thought-through action.

Published on the March 2023 issue of Geographical Magazine


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