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Home Finance Green debt swaps firmly on the agenda, says new Planet Tracker report

Green debt swaps firmly on the agenda, says new Planet Tracker report

by maria gbaf

With the World Bank and the IMF planning green debt swaps, financial think tank reveals why African countries should be the priority debtors

LONDON –  The World Bank and the International Monetary Fund (IMF) are promoting green debt swaps and are working to have a plan in place by November, ahead of COP26. The two Bretton Woods Institutions are developing an ‘organising framework’ that will connect debt relief to a country’s plan for investing in environmental improvement.

A green debt swap involves an indebted developing country undertaking – in exchange for cancellation of a portion of its foreign debt – to establish local currency funds to be used to finance an environmental, climate or nature programme. Green debt swaps have three main benefits: they enhance climate/nature/green spending, boost economic recovery, and reduce external sovereign debt. The joint requirements for green debt swaps indicated by the World Bank and the IMF are high levels of indebtedness and a “climate” or “green” agenda.

In a new report published today, Planet Tracker examines this broad climate and environmental definition against two main measures: the Notre Dame Global Adaptation Index (ND GAIN) and a country’s percentage of protected areas as a proportion of national territory.

The ND GAIN aims to summarise a country’s vulnerability to climate change and other global challenges, such as over-crowding, food insecurity and inadequate infrastructure, in combination with its readiness to improve resilience. It aims to help governments, businesses and communities better prioritise investments for a more efficient response to these global challenges.

Highly Indebted Poor Countries (HIPCs) have a lower (worse) ND GAIN score of 36.5, compared to the rest of the world (ROW) at 52.6. Norway has the highest (best) score in the world at 76.7. Planet Tracker aggregated the ND GAIN scores with debt levels, giving them equal weight, and ranked the top 10 HIPCs. The resulting list contains only countries on the African continent.

The report’s author, John Willis, Director of Research at Planet Tracker, said: “When we ranked countries by the percentage of protected areas as a proportion of national territory, this produced a very different list.  Oceania and Latin America (including the Caribbean) rank as the highest priority, because they have a large number of small island states with a low proportion of their territorial waters covered by marine protected areas.”

He added: “However, when Planet Tracker aggregated debt level and protected areas metrics into one combined score, the resulting list only contained countries in the African continent. This shows that regardless of the methodology used, and because of its prominence in the HIPC group, the African continent should have high priority when determining which countries are most in need of green debt swaps.”

To make these swaps more widespread, the report recommends that:

  • The debtor nations need to determine whether their development plans can align with sustainable financial instruments and, if not, what needs to be adapted. The finance ministries and central banks of these countries should be contacting International Financial Institutions (IFIs) as well as their creditors. Some argue that the debtor nations, especially from emerging and developing countries, need to get into the driving seat.
  • Creditor countries will also need to play their part. They should review their debt restructuring frameworks to incorporate issues such as environmental/green and nature/biodiversity objectives. They can also invest in the research required to embed sustainability risks into fiscal and monetary policy rules globally, sharing this through other institutions.
  • The private sector alsohas an important part to play. Presently, there are well documented inflows into sustainable products, so investors can play a systemic role in responding to and moving this agenda. Where investors are unprepared to do it alone, blended finance options may be possible.
  • The international financial institutions(IFIs) continue to push the agenda on this topic. They have already provided leadership in sustainable finance, funding different types of products such as blue bonds. IFIs are able to work with governments and investors to identify and deploy innovative instruments or reboot the process. They can also be important providers of technical assistance to countries to align their policies, identifying and eliminating perverse incentives and shifting available public finance in the direction of the chosen funding mechanisms, all of while can act as an encouragement of private capital flows as well.

The full report, Green Debt Swaps – Firmly On The Agenda, is available here.

Notes for editors

Planet Tracker is a non-profit financial think tank aligning capital markets with planetary boundaries. It was created primarily for the investor community to analyse the risk of market failure related to environmental limits which, other than climate change, are often not aligned with investor capital. Planet Tracker generates breakthrough analytics to redefine how financial and environmental data interact with the aim of changing the practices of financial decision makers to help avoid both environmental and financial failure.