Why climate-swap debt is a bad idea
By Godwin Anyebe
An article in Bloomberg estimates that the market for both public and private climate-swap deals is set to exceed $800 billion.
In fact, the swaps are more popular than they’ve ever been, as large banks look to make more ESG-related deals and higher interest rates pressure emerging-market countries to, for instance, renegotiate debt.
A scene on the streets of Libreville, Gabon in August during the military coup that overthrew the government months after a debt-for-climate deal.
Take the Nature Conservancy, whose website claims that the environmental NGO enabled a deal that reduced Belize’s debt by 12 of GDP, unlocking $180 million for the impoverished nation’s treasury over the next 20 years.
But Barclays has raised concerns that such deals — the Belize swap in particular — are not being adequately scrutinized or are examples of “greenwashing,” when monies are earmarked to promote conservation but never actually amount to much.
Indeed, the greenwashing would not be so terrible if all that swap money was going somewhere useful.
Instead, argues Barclays, much of it is being deployed to pay bank fees and other intermediaries.
Also, as the recent Gabon coup illustrates, these swaps can enable corruption and unrest and are often characterized by a lack of transparency.
A debt-for-climate swap was intended to reduce Belize’s debt by 12% and provide the nation with $180 million in extra cash.
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A group of 31 nonprofits recently criticized the swaps on the grounds that the money raised goes to domestic conservation NGOs, some of which run annual budgets suspiciously larger than many government departments or civil society organizations.
The problems with green debt swaps go deeper than poor implementation or lack of accountability.
There is something unseemly about European and American banks imposing their values on poorer countries that usually have more pressing economic demands.
Emerging markets often need investment in projects that could alleviate poverty and promote development — while still paying off for investors in both the short and long term.
ESG — or “environment, social and governance”-based investing — has become popular with progressively-minded investors. Debt-for-climate deals increasingly reveal the risks involved in such eco-diplomacy efforts.
And local investors typically have a better sense of what a nation’s fiscal priorities should be. Which is why the real danger posed by the swaps is that they create market distortions that favor politically popular Western ideas rather than truly serve economies in need.
There are also the long-term obligations created by these swaps, problematic when much can change in a few years — let alone over a few decades — in countries with corruption and other political risks.
It’s unclear if the new government in Gabon, for instance, will honor the previous government’s climate deal and use the funds as intended.
The Gabon contracts are insured for political risk, which will pay out the loan-maker if the country defaults or fails to use the money for conservation.
Debt-for-climate bonds are clearly well-intentioned: Markets can be too focused on the short-term and under-value cleaner oceans. Still, the arguments made by climate-swap supporters don’t fully add up.
The Nature Conservancy, for example, maintains that rich countries have a moral obligation to bankroll the swaps because they gained their wealth by polluting the planet.
But to whatever extent this is true, climate risk is not solved by expecting emerging markets to funnel their scarce capital into conservation simply to please progressive ideologues.
