Devex Invested: Climate finance goes big and bold

This week it’s out with the theoretical and in with the practical examples of how governments, development finance institutions, and bankers are spurring finance for climate and conservation. A debt-for-conservation deal in Ecuador finalized last week is the biggest transaction of its kind — by many orders of magnitude. The deal converted about $1.6 billion in existing commercial debt into a new $656 million loan. Debt-for-nature swaps are transactions where a portion of debt is forgiven or refinanced in exchange for the local government investing in conservation or climate priorities. While there have been some 140 debt-for-nature swaps over the years, most are at a much smaller scale, with the average size in the $26 million range, says Giuseppe Di Carlo, director of Pew Bertarelli Ocean Legacy, which helped put together the transaction. “This provided an opportunity to prove that this sort of cooperation between the finance sector and conservation really can bring some benefits,” he tells me. • Here’s how the deal breaks down: Credit Suisse bought the distressed debt and financed a new long-term loan with a lower rate by issuing a marine conservation-linked Galápagos Marine Bond. The U.S. International Development Finance Corporation provided $656 million in political risk insurance for the loan, and the Inter-American Development Bank provided an $85 million guarantee to help make the deal possible. A group of 11 private insurers are also providing more than 50% reinsurance for the project. • With more than $1 billion savings in debt repayments, the government of Ecuador has committed to spending about $17 million a year for conservation for the next 18 years, with about $5.4 million annually going to support a permanent endowment to continue financing projects after that. A new entity, the Galapagos Life Fund, will manage the money. A process involving government, environmental groups, and organizations representing the tourism and fishing industries helped determine the 21 commitments the government is making to support the marine-protected area, enhance fisheries management, and improve the local economy and tourism. • “Not only is this the largest operation of its kind, but it is the first time that a multilateral institution is combining guarantees with political-risk insurance to mobilize resources from different actors towards conservation,” IDB President Ilan Goldfajn said in a statement. The Ecuador deal pioneers “innovative approaches and instruments that can be replicated and scaled globally,” he said. • While many of the parties involved are touting the deal as a key demonstration of the potential of such transactions, don’t expect them to happen overnight. The Pew Bertarelli Ocean Legacy Project started working with the Ecuadorian government to develop the swap in 2019. Meanwhile, in another example of climate finance innovation, across the world, the Asian Development Bank is piloting a new approach to climate finance by using donor guarantees to raise money through the bond markets that it can lend to countries to reduce emissions and support climate adaptation. The bank hopes to turn $3 billion in donor guarantees into $15 billion for climate projects, my colleague Shabtai Gold writes. It will be interesting to see if the Ecuador deal paves the way for more similar transactions — especially large-scale swaps. And whether a successful ADB pilot will lead other MDBs to look to use donor guarantees to leverage more funding down the line. Read: Asian Development Bank’s $15B big bet on new climate scheme (Pro) + Start your 15-day free trial of Devex Pro today to access all our exclusive reporting and analysis. Warning signs Sometimes climate policies billed as innovative can have unintended consequences. Take the European Union’s landmark climate-focused industrial policy, the Carbon Border Adjustment Mechanism, which is meant to drastically cut greenhouse gas emissions. And though it’s designed to encourage cleaner industry outside the EU, a new study shows how it will hurt African exports and could cost African countries $25 billion a year, my colleague William Worley reports. “We are in a situation where some of the regions that have contributed [least] to climate change happen to find themselves in a situation where they will see some revenue loss as a result of a climate action measure,” says Faten Aggad, senior adviser on climate diplomacy and geopolitics at the African Climate Foundation. Read: Will Europe’s landmark climate scheme make Africa poorer? Culture of fear There’s been an emerging trend when communities come to the independent Inspection Panel at the World Bank with complaints about the lender’s development projects: fear. “Almost every request we have now, requesters want confidentiality. There is a real fear of reprisals for coming,” Ramanie Kunanayagam, who heads the Inspection Panel, tells Shabtai. As the bank’s internal watchdog turns 30 this year, Shabtai looks at the challenges it faces and how it can do better. Read: World Bank projects complainants plagued by fear of reprisal Gaining leverage Mobilization is one of those oft-discussed terms, an at times seemingly mythical ideal that will unlock more private capital for development and climate challenges. To help you understand where things stand with how public or concessional capital can help attract those private dollars, we asked some experts. In the first in a series of op-eds, Nnamdi Igbokwe, the director of knowledge and thought leadership at Convergence, the global network of blended finance, paints a picture of the state of play. It turns out that blended finance transactions tend to have a leverage ratio of about 4:1. In other words, for every donor dollar invested, about $4 of commercial capital is brought into the deal, though about half of that is from MDBs or DFIs. But that hasn't changed much in the past five years, and Igbokwe lays out how that can improve. Opinion: For blended finance to work, use strategic leverage ratios Bad timing The somewhat controversial land reforms Malawi has enacted over the last year, especially rules restricting foreign ownership, are likely to spook foreign investors. Foreign direct investment to Malawi averaged just $50 million in 2021. By 2023 it wants to hit $3 billion — a whopping 59-fold increase. “These reforms send the message ‘Don’t come to Malawi,’ and we are already seeing evidence of potential investors being scared away,” Steve Morris, team leader of Traction, a U.K. aid-funded policy program running in Malawi, tells Devex contributors Sophie Edwards and Madalitso Wills Kateta. “We desperately need foreign direct investment to come in to commercialize production, processing, and get the country into light manufacturing,” Morris says. In particular, he wants funds for agriculture. Read: Malawi land reforms spark controversy, fear of lost investment What we’re reading BNP Paribas to stop funding new gas projects as litigation risk mounts. [Financial Times] Ghana’s official creditors pave the way for IMF signoff on $3 billion loan. [Reuters] How Ghana’s economy became a cautionary tale for Africa. [Financial Times] Shabtai Gold contributed to this edition of Devex Invested.