Debt for climate

Belize plays the ESG card to force debt restructuring with international investors.

On 3 September 2021, the Ministry of Finance of Belize signed an agreement with a committee of institutional investors, including Aberdeen Standard Investments, Mayo, Van Otterloo and Greylock Capital, to buy back the country’s only international bond for 55 cents in the dollar.

Belize restructuring its debt isn’t that noteworthy, it has done so five times over the past 15 years, but what caught our eye is that this buyback comes with a commitment from the Belize government to invest USD 23.4 million into a marine conservation trust to protect the country’s barrier reef.

Despite taking a 45% haircut, many of the larger asset managers are happy to see Belize committing to take action to protect the environment. Some hedge funds are less enthused, as you might imagine.

Belize has been working with The Nature Conservancy, TNC and the Global Environment Facility, GEF, that have experience in the Caribbean Region. This builds off the Caribbean Challenge Initiative (“CCI”) which provides countries with long-term support needed to achieve CCI commitments, as a result of which the Caribbean Biodiversity Fund (“CBF”) was established. 

A climate finance specialist in the Caribbean explained, “Belize has been working with several stakeholders on this for several years, including the Commonwealth Secretariat. The general concept is ‘debt-for-climate’, countries with limited fiscal space can reduce their debt burden by taking action against climate change.”

“The general concept is ‘debt-for-climate’, countries with limited fiscal space can reduce their debt burden by taking action against climate change.”

Climate finance specialist, Caribbean

A number of countries in the region have been actively looking at new and innovative ways of restructuring their debt since 2017, made more important in light of the additional economic strain resulting from the COVID-19 pandemic. St. Lucia, Antigua & Barbuda and St. Vincent and the Grenadines may be the next big opportunities in this area.

The climate finance specialist continued, “Several countries have been keen to explore the debt-for-climate concept and the GEF has been looking at how it can support these countries and their creditors. The Economic Commission for Latin America and the Caribbean (“ECLAC”) has started pilots with a number of them”

“A lot could go wrong, […] If the money is diverted into other areas that have no relation to the climate, will there be calls for the renegotiation of terms?”

Climate finance specialist, Caribbean

In terms of risks, the specialist outlined several areas of concern, “A lot could go wrong, as there are many extreme climate events in the region and if you’re talking about debt for climate then the countries have to act, will they be able to? Also, the political environment is changeable and government attitude and priorities can turn very quickly. If the money is diverted into other areas that have no relation to the climate, will there be calls for the renegotiation of terms?”

Finally, the devil will be in the detail and precise terms are not yet known, however we found it fascinating that ESG commitments are being used to secure favourable terms on investments.

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