(Bloomberg) -- In a niche corner of global debt markets, a product first structured three years ago by a group of Credit Suisse bankers is having a moment.
The instrument — a so-called debt-for-nature swap — is designed to refinance government debt and put savings toward sustainable projects. Only two banks — Credit Suisse and Bank of America Corp. — had ever arranged such swaps as recently as last year. Now, at least five more banks have similar deals in the works.
Standard Chartered Plc has a swap in the pipeline and BNP Paribas SA is exploring a deal, according to people familiar with those transactions who asked not to be identified discussing private deliberations. JPMorgan Chase & Co. just structured a $1 billion deal for El Salvador, Bloomberg reported late on Wednesday.
Goldman Sachs Group Inc. is laying the groundwork for a new deal for Ecuador, and UBS Group AG is close to wrapping up a transaction with Barbados, Bloomberg’s reporting has also shown.
“If all of them fit, we would love to invest in all of them,” Stephen Liberatore, head of ESG and impact in global fixed income at Nuveen Asset Management, a unit of TIAA, said in an interview. “We expect to see more growth in the space.”
Spokespeople for Goldman Sachs, UBS, BNP Paribas and StanChart declined to comment on the deals.
The development coincides with efforts on Wall Street to monetize an area into which the United Nations wants to channel more private finance. Protecting biodiversity and nature have so far largely defied efforts to generate standardized financial products. Debt-for-nature swaps are gaining a foothold as an exception.
“There is increasing interest in doing more,” said Liberatore of Nuveen, which invested Ecuador’s first swap, the world’s largest at the time.
Once the domain of public finance only, debt-for-nature swaps were reinvented three years ago by Credit Suisse and the Nature Conservancy, a nonprofit, to include private investors. To date, at least $1.6 billion of new debt has been issued to finance such deals, according to data compiled by Bloomberg. That includes a Bank of America-led deal for Gabon last year.
Though small, “the debt-for-nature swap world is now almost an asset class of itself,” Marisa Drew, who’s been chief sustainability officer at StanChart since 2022 following almost two decades at Credit Suisse, said in an interview. Such swaps currently have “certain applications in certain places,” she said, without commenting on the bank’s current deal. “But it is scaling.”
Detractors have questioned whether the costs entailed in attracting private investors to such deals are justified, given the cash-strapped countries they target. And doubts have also been raised around the matter of scalability, given the deals tend to require considerable tailoring to meet the specific needs of each country.
Earlier this year, nonprofits being advised by Daniel Ortega, Ecuador’s former environment minister, filed a complaint relating to that country’s $656 million swap, alleging a lack of transparency. They question whether the Inter-American Development Bank — which backstopped the transaction with an $85 million guarantee — conducted an adequate environmental and social-risk assessment, and claim that local communities weren’t properly consulted.
In response, IDB President Ilan Goldfajn said the group takes such concerns seriously. The complaint will follow due procedure under the auspices of the group’s Independent Consultation and Investigation Mechanism, MICI, he said.
“We are going to have better projects where there’s the buy-in of communities,” Goldfajn said. And for the next Ecuador swap, IDB will “need to be very strict on our safeguards.”
The Ecuador complaint represents a rare test case for MICI. Between 2000 and 2022, just 1.3% of IDB Group-approved operations have been subject to complaints filed via the dispute mechanism.
The outcome of the MICI investigation has the potential to sway market interest.
Eric Pedersen, head of responsible investment at Nordea Asset Management, had been an investor in Ecuador’s first swap but ended up exiting. He said such complaints “need to be thoroughly looked into.”
Investors in debt-for-nature swaps are “buying impact coupled with returns, and the credibility of the impact component is essential,” he said.
Oliver Withers, who left Credit Suisse early last year to become head of nature at StanChart, says “these instruments are evolving.” He also says there are new nonprofit and credit-enhancement actors joining the market, including new philanthropic capital. And it’s even possible that such swaps might be repurposed for corporations, he said, without commenting on any specific deals in the works.
The Pipeline
The IDB and the Global Environment Facility, a Washington-based family of funds, have together approved a $681 million guarantee facility to back new deals for three countries in Latin America and the Caribbean.
In Africa, a group of at least five nations is looking into potential debt-for-nature swaps that might be backed by a credit facility of about $2 billion, according to Thomas Sberna, coastal and ocean resilience head for east and southern Africa for the International Union for Conservation of Nature. The deals would help finance projects to protect coral reefs in the Indian Ocean, he said.
Separately, Zambia is analyzing the benefits of a potential swap, Angola is considering a deal involving the Nature Conservancy, which advised on most of the deals completed so far. And Kenyan lawmakers approved the Treasury’s plans to offer debt-for-nature and food-security swaps to bolster the nation’s finances.
Efforts are underway to come up with more streamlined deals, according to Withers. And banks are keen to figure out how to “execute them faster.” They’re also grappling with “the amount of savings that is going to go towards sustainability” and making sure the governance and oversight of the deployment of those savings “is more efficient.”
“We’re going to find 1% efficiency everywhere,” he said.
--With assistance from Candido Mendes, David Herbling and Matthew Hill.
