Given the current climate finance flows are insufficient, inefficient, and unfair, there is an urgent need to reform and increase financing to address climate, nature and debt challenges.
Risk mitigation and credit enhancement solutions, such as guarantees, can catalyze private sector investment at significantly larger multiples than traditional financing methods.
In 2022, the global public debt stands at USD 92 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.
Sustainability-linked sovereign financing offers innovative solutions for vulnerable countries facing the triple climate, biodiversity, and debt crisis, using risk mitigation and credit enhancement mechanisms that allow countries to lower borrowing costs and attract private investment. Overall, these solutions can catalyze private sector investment at significantly larger multiples than traditional donor finance and concessional lending – by a factor of 55x and 5x respectively.
Belize, Ecuador, and Gabon’s debt-for-nature conversion are recent examples of possible tangible gains in debt reduction and sustainable financing for conservation, thus showcasing the potential of sustainability-linked financing.
The Joint Declaration and Task Force on Credit Enhancement of Sustainability-Linked Sovereign Financing for Nature and Climate launched at 2023 UN Climate Change Conference, COP28, is a crucial step in addressing the debt, nature, and climate crises.
This Joint Declaration and subsequent establishment of a Task Force aims to respond to the needs of Global South countries by providing long-term fiscal solutions, avoiding short-term debt relief that relies solely on international development assistance.
The Taskforce will hold its first meeting in January 2024, and will be led by Inter-American Development Bank (IDB) and United States International Development Finance Corporation (DFC). Both have been involved in the recent debt conversion deals, which have included Barbados and most recently Gabon.
The World Bank has also expressed support for the Task Force and interest in collaborating to advance these efforts. Further, major providers of insurance and reinsurance solutions have pledged to collaborate with the Task Force and work with the governments to reduce the borrowing costs for developing countries. They have expressed their willingness to support the issuance of sustainability performance-linked sovereign debt instruments addressing the threefold crisis of debt, climate and nature.
There is broader political momentum around this issue, as signalled by Global Debt Review on Climate and Nature, Forest and Climate Leaders’ Partnership, and Sustainable Debt Coalition, and the Chair of V20 Group.
STATEMENT OF SUPPORT FROM THE INSURANCE INDUSTRY
STATEMENT OF SUPPORT FROM V20 CHAIR
“Sustainability-linked sovereign financing offers innovative solutions for vulnerable countries facing the triple crises; climate shocks, biodiversity loss, and debt crisis, it does so by using credit enhancement mechanisms to lower borrowing costs and attract private investment. This Joint Declaration and Task Force is a critical effort forward towards addressing key barriers that will catalyze financial flows towards nature and climate adaptation goals.” – Bogolo Kenewendo, Africa Director and Special Adviser to the UN Climate Change High-Level Champions
“Debt-for-nature swaps are critical tools as we work to close the nature financing gap with more investment through capital markets. The Global Biodiversity Framework agreed one year ago sets out important commitments that require funding to become reality. At the same time, developing countries are facing increasing global costs of borrowing and need support to meet their climate and nature commitments. The GEF sees great promise in this partnership with multilateral development banks, development finance institutions, and international organizations – together we can provide credit enhancements at scale and to all countries interested. Doing so is critical to underpinning action that can restore the health of our planet.” – Carlos Manuel Rodriguez, CEO and Chairperson, Global Environment Facility
“Our motivation for being part of this (task force) is to bring debt-for-nature swaps and related instruments to the forefront.” Hassatou Diop N’Sele, Vice-President for Finance and Chief Financial Officer at the African Development Bank
“The IDB has long been a pioneer in innovative finance. By strengthening our collaboration with multilateral development banks and other stakeholders, we are looking to scale up and enhance the impact of climate and nature finance. We are at a critical juncture where innovative finance will be vital in helping countries access the needed resources.” – “ Ilan Goldfajn, President, Inter-American Development Bank
“The establishment of a Task Force on Sustainability-Linked Sovereign Financing for Nature and Climate is a commendable initiative. We believe this technical team will play a critical role in enhancing the effectiveness, efficiency, and scalability of credit enhancement tools, creating a more conducive environment for sustainable development financing, especially underpinning our Climate Prosperity Plans.” – Ken Ofori-Atta, Minister for Finance, Ghana, V20 Chair
“Recognizing the critical role of sustainable debt and sustainability linked sovereign financing, in securing a sustainable future, I welcome this effort of the Joint Declaration on Credit Enhancement. In forging a future where debt and sovereign financing are not only sustainable but also robust and inclusive, let us rally together MDBs, DFIs, reinsurers, and all stakeholders towards a shared vision to unlock finance for nature and climate goals.” – Dr. Mahmoud Mohieldin, UN Climate Change High-Level Champion for COP27
“In order to make real progress on addressing the climate crisis, we have to work together. DFC is committed to partnering with like-minded organizations and I am optimistic that this new task force will deliver concrete results.” – Scott Nathan, CEO, U.S. International Development Finance Corporation (DFC)
“We must protect the planet’s natural resources for both biodiversity and fighting climate change. The need for catalyzing finance into nature positive investments is urgent, the scale of finance required is massive, and the pipeline of nature positive projects is not always readily bankable. To attract the much-needed scale of private capital especially from the capital markets, and at affordable costs, development banks, philanthropic entities and governments must work together to develop the right financial instruments, derisking mechanisms and the most impactful nature positive projects. This joint declaration shows our commitment to achieving those objectives.” – Warren Evans, Special Senior Advisor for Climate Change, Asian Development Bank (ADB)
Events at COP8
Dec 4, 2023, 8:30-10:30am GST
High-Level Event: Nature and Water Finance for Climate Action
Organized by: COP28 Presidency, World Bank Group, UN High-Level Climate Champions, OECD
GCA Arena 2 – Al Wakri – Blue Zone
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Dec 4, 2023
3:00-4:00pm GST
Organized by: Sustainable Debt Coalition, UNECA, Sustainability-Linked Sovereign Debt Hub, NatureFinance, The Nature Conservancy, University of Oxford with the support of UN High-Level Climate Champions
Lab 2 – Al Jeer- Blue Zone
Background
This Working Group on Nature and Climate-Linked Sovereign Financing, led by Sustainability-Linked Sovereign Debt Hub and The Nature Conservancy (TNC), with the support of UN High-Level Climate Champions and COP28 Presidency, was set up with a mandate to design and develop a mechanism to unlock credit enhancement for performance-based sovereign financing and other use cases including sustainability-linked bonds.
The Working Group has aimed to align the capabilities and/or pool the capacities of international financial institutions to issue credit enhancement instruments such as partial risk guarantees and political risk insurance at the requisite scales.
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