MDB sovereign nature and climate initiative aims to build “efficient and effective” market for debt-for-nature swaps and sustainability-linked bonds.
A new multilateral development bank (MDB) taskforce focused on sovereign financing for climate and nature aims to move the sector from “silo” working and demonstrate its potential for blended finance, according to Switzerland-based NGO NatureFinance which is acting as its secretariat.
The Task Force on Credit Enhancement of Sustainability-Linked Sovereign Financing for Nature and Climate launched at COP28 and will hold its first meeting in January 2024. It will be led by Inter-American Development Bank (IDB) and the United States International Development Finance Corporation (DFC).
In 2022, the global public debt stood at $US92 trillion. More than half of all low-income countries, 37 out of 69, are assessed to be at high risk or in debt distress according to the latest IMF and World Bank Debt Sustainability Framework.
Speaking to ESG Investor, Arend Kulenkampff, Head of Sustainability-Linked Sovereign Debt at NatureFinance, said the taskforce will focus primarily on credit enhancements, including partial risk guarantees, political risk insurance bond guarantees, debt-for-nature swaps and sustainability-linked bonds (SLBs).
In September, the Development Bank of Rwanda (BRD) launched its inaugural SLB focused on women-led business loans and financing affordable housing. There have also been nature-for-debt swaps, where sovereign debt is renegotiated on better terms with nature protection targets included in the deal, issued by the governments of Belize, Ecuador and Gabon.
Kulenkampff said the recent wave of debt-for-nature swaps demonstrated the potential for credit enhancement, but also the complexities and inefficiencies of such deals. “One thing the taskforce will try and do is develop more efficient solutions for debt-for-nature swaps, but also to develop new ways of guaranteeing SLBs that have climate or nature objectives.”
He added that the taskforce was a recognition of the need for blended finance to mobilise private capital to close climate and nature financing gaps; “guarantees and other credit enhancement mechanisms do have higher mobilisation rates than concessional lending,” he noted.
“Rather than each MDB doing its own thing operating in silos and in an uncoordinated fashion, the taskforce is meant to provide a platform for them to firstly communicate, but also coordinate their activities. The ideal outcome one would hope for is a more efficient and effective credit enhancement solution that is harmonised across the MDB/DFI (development finance institution) system.”
The Asian Development Bank, the African Development Bank, France’s Française de Développement and the European Investment Bank will also be members, as well as the Green Climate Fund, the Global Environment Facility, the World Bank and the Asian Infrastructure Investment Bank (AIIB).
Nature as an asset
The AIIB launched at COP28 a concept paper arguing that nature should be considered as infrastructure.
Erik Berglof, Chief Economist at the AIIB, told ESG Investor that it was interested in going beyond “nature positive” to achieve its full potential, including as infrastructure such as flood barriers or carbon sequestration.
Jangping Thia, Lead Economist at the AIIB, added that Asia’s infrastructure needs going forward were estimated to be US$2 trillion a year. “If we continue to use more steel and more concrete it’s going to be even more taxing on nature,” he warned.
The AIIB paper noted that trees, mangroves and wetlands provide valuable services, and where nature can provide infrastructure-like services, steel or concrete infrastructure should be carefully considered, with investments in nature’s restoration becoming the norm rather than then exception.
It added that nature’s value is underestimated, arguing that at a macro level there is a need to understand how economic activity of countries and sectors depend on nature and at a micro level, there is a need to understand the intricacies of local ecosystems and the tremendous and often unpriced services they bring and factor these meaningfully into all development decisions.
Kulenkampff said in a debt-for-nature swap the premise was that nature “is an asset” and that it can deliver payments or generate revenue streams for governments.
“There’s value in recognising it on a sovereign balance sheet, and that it should signify stronger credit worthiness to have natural assets. We’re not quite there yet because current risk models don’t recognise nature, but there is certainly movement towards that,” he said.