Using Debt Swaps to Tackle Debt, Climate, and Nature Loss

The International Institute for Environment and Development (IIED) published a paper about the use of debt swaps to address the debt, climate, and biodiversity crises. Published in September 2020, the paper illustrates how governments could address this triple crisis in their COVID-19 recovery packages using debt for climate and nature program swaps. According to the paper, debt for climate and nature program swaps “are where a creditor allows the debt to be reduced—either by conversion to local currency and/or paid at a lower interest rate or some form of debt write-off—and the money saved is used to invest in poverty-reducing climate resilience, climate emissions mitigation or biodiversity protection initiatives.”

The authors introduce the concept of such debt swaps, present their advantages and potential challenges, provide information for the implementation, and explore how the swaps can become more economically feasible. The publication includes a list of countries “at the intersection of climate vulnerability and risk, biodiversity richness, indebtedness and creditworthiness” to support the identification of priority countries for debt for climate and nature program swaps. The top five countries in this ranking are Cabo Verde, Vietnam, Honduras, Kenya, and Nicaragua.

“Engineering new types of swaps that are both financially feasible and stimulate sustainable investment will be a complex and daunting task, but given the tremendous challenge of COVID-19 that is facing the world, they could provide a new template for future debt sustainability and ensure long-term climate-resilient, low-carbon growth.”