July 16, 2025 • 42 mins
Debt-for-nature swaps are gaining traction as a way to restructure sovereign debt in exchange for conservation commitments. In this episode of ESG Currents, Bloomberg Intelligence director of ESG research Eric Kane and senior ESG associate Melanie Rua speak with Slav Gatchev, who leads The Nature Conservancy’s Sustainable Debt team, and Jake Harper, senior investment manager for Alternative Debt at Legal & General. Together, they discuss how these deals are structured, the role of new market standards in improving investor confidence and takeaways from landmark transactions in Ecuador and Gabon. Legal & General has invested nearly $500 million across four swaps, while TNC’s work has unlocked over $1 billion for conservation.
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Episode Transcript
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Speaker 1 (00:09):
ESG is constantly evolving. Over the years, it has shifted
from socially responsible investing to impact to sustainable finance. While
the terminology continues to change, what hasn't changed are the
underlying science, market pressures, and tangible physical and financial impacts
of the climate crisis, increasing regulatory scrutiny, and rising consumer expectations.
(00:33):
We aim to filter out the noise by speaking with
industry experts to identify what is really driving value. Welcome
to ESG Currents. I'm Eric Caine, director of ESG Research
for Bloomberg Intelligence, and.
Speaker 2 (00:46):
I'm Melanie rua senior ESG research associate, and we are
your hosts for today's episode. Today, we're exploring debt for
nature swaps, arising mechanism in sustainable finance that enables countries
to restructure sovereign debt in exchange for biodiversity or climate
related conservation commitments. While these transactions have historically been niche,
(01:08):
they are a gaining traction. Ecuador, Belize, Gabon, and Barbados
have all closed multi hundred million dollar deals in recent years,
unlocking significant funds for nature protection. Earlier this month, the
Nature Conservancy, alongside a multisector Advisory Group released the first
ever practice standards for debt conversion projects aimed at improving
(01:30):
the transparency, scalability, and impact of these complex but powerful
financial tools. Joining us today to unpack this evolution are
Slav Gatchev, who leads the Nature Conservancy's Sustainable Debt team
and has help structure six nature bond projects expected to
unlock over a billion dollars in funding for conservation, resilience
(01:52):
and community development. And we also have Ja Carper, Senior
investment manager for Alternative Debt Illegal In general, Ellen has
committed over a billion dollars to nature conservation and sustainable
debt development in emerging markets, with almost half a billion
dollars invested in debt for nature transactions across Police, Ecuador
and Gabon. Ellen g was also the cornerstone investor in
(02:15):
Ecuador's twenty twenty three Galapaco's debt for nature swap, one
of the largest transactions of its kind. Slav and Jake,
thank you for being here.
Speaker 3 (02:24):
Great to be here, Thanks for having us.
Speaker 2 (02:26):
Thanks so so, Slav, you've helped lead TNC's efforts on
some of the largest nature bonds today. Can you walk
us through what a debt for nature swap is and
how this model evolved into a scalable tool for conservation finance.
Speaker 3 (02:42):
Yeah, thank you very much for the opportunity and for
this question and the shout out to TNC. Indeed, we
we're proud to have pioneered the genre of, if you will,
contemporary debt conversions as we call them, to distinguish them
from some of the year government to government that for
(03:02):
nature swaps that were rather rather smaller in size. Once
you tackle commercial debt, then you're able to really scale
up like we've like we've shown so so just the
six T and C deals collectively refinanced three billion of
pre existing commercial debt, mostly eurobonds, most of which we
(03:26):
were trading at a steep discount and were otherwise unsustainable,
with two billion plus of new sustainable issuances on much
improved terms, longer tendards, lower interest rates principally, and more
to the point, generating as you mentioned, over a billion
dollars for conservation and community projects in these six countries.
(03:53):
In terms of the nature impact, which is what this
is really about. The impressive at the financial figure are
what really drives us is the is the nature and
biodiversity impact. We're talking about fifty three million hectors of
new protected areas both marine interrestrial through these projects, and
(04:14):
two hundred and forty two million hectors have improved management,
which really is as good as new, if you will.
In that a lot of national parks in the global
souther are so severely underfunded that there you know, parks
in name only or paper parks, if you will, And
(04:34):
we want to change that. And so why, you know,
why is all of that important? Well, to throw another figure,
eighty eight percent of the so called last chance ecosystems
are in countries with moderate to hide that distress in
the global seuth and if you look at the total
(04:56):
outstanding stock of commercial debt for developing countries of around
two trillion dollars, mostly eurobondes but also syndicated loans, close
to a third of that is a staggering number is
under some pressure or distress. That's also reflective in the
MB plus index, which tracks the performance of emerging market bonds,
(05:18):
where a scary number of issuers about still about a third.
So that's a double digit number of countries have market
rates yield to maturity exceeding ten percent, which effectively shuts
them out from the international capital markets. As the result
of all of that, there is we estimate there is
about a seven hundred billion annual funding gap for nature
(05:41):
and you know, so then you see the point of
these projects, right, which strike at the core of the
triple crisis, if you will, the debt, resilience and biodiversity crisis,
by helping countries refinance their debt and generate you know,
significant funding for conservation, no additional burden to their national treasure.
(06:03):
So the one billion dollar number that I mentioned earlier,
you know, otherwise, so that came at no additional cost
to national treasure. Is it didn't add to their death stock.
Otherwise they would have had to borrow it or scramble
to find that funding. So it's fit for purpose in
today's world. You know, whenever I answered that question, half
(06:26):
of me wants to appropriately tout the appropriateness of this structure.
In the other half, you know, once to caution that
these projects are not a panacea.
Speaker 1 (06:37):
Right.
Speaker 3 (06:38):
The seven hundred billion funding gap will not absolutely manifestly
will not be solved through that conversions alone. So a
lot more is needed by way of private investment, foreign
direct investment, more government to government lending, and indeed grants
and payments for ecosystem services, but certainly that for nature
conversions or an appropriate tool, and a scalable and powerful
(07:01):
one at that super interesting, So thanks Jake, Maybe a
question for you Ellen G has invested in four of
these transactions, more than any other institutional investor to date.
What draws the firm to these deals and how do
they fit within your broader investment strategy?
Speaker 4 (07:20):
Thanks, thanks Eric, and thanks for having me on the podcast. Look,
I think we believe these types of transactions are a
prime example of how we can achieve strong commercial returns
alongside delivering positive nature and social outcomes. Working with strong
NGOs such as the Nature Consurveyancy to help conserve critical
(07:43):
nature and by diversity areas globally is clearly very important
to us as an investor. And likewise, the strong credit
protections both within the structure and ultimately with the political
risk insurance and guarantees being provided by the likes of
Intermat Development Bank and other other institutions in the space,
All these combined to provide an attractive risk return dynamic.
(08:06):
When we're looking at this behalf of our clients and
clearly the other key thing that really helps us, you know,
kind of take part in these transactions. Is that conservation
is front and center, which is clear by the incorporation
of key milestones that can drive the outcomes desired and
working alongside with the nng o's at the TNC LNG
(08:28):
has committed over one billion dollars in private debt financing
for nature conservation and sustainable development and emerging markets and
debt conversions form a significant part of these investments and
we see that being a significant portion of the where
we continue to deploy it and likewise, we believe investors
can and should be capitalizing on the investment opportunity presented
(08:52):
in the four trillion dollar and your funding gap for
emerging markets to meet the un disabled dort and goals
and the potential for strong return and divestification that exposure
to emerging markets can provide. And just recently, Lang launched
its Nature and Social Outcome Strategy, which will leverage in
ad to financing methods such as these that benefit from
(09:13):
credit enhancement and aim to deliver strong commercial returns alongside
positive nature and social outcome.
Speaker 2 (09:19):
Thanks for sharing, Jake, and you know, going back to
u Slav the launch of the practice Standards for debt
conversion projects really marks a major milestone. What were the
key challenges these standards were designed to solve and how
do you see them shaping the next phase of deals?
Speaker 5 (09:37):
Yeah?
Speaker 3 (09:37):
Absolutely, I mean, like you rightfully said, this genre is
becoming more and more popular and we couldn't be more pleased.
As an NGL. We want to be super open sourced
and be building bridges and encouraging others to pursue ambitious,
high quality projects, and that is happening already. So I
(09:59):
quoted some of the UH financial and other figures associated
just with with TNC's six projects. But last year, for example,
you had several and before with with Jake's Galapagoz project,
you have several other sponsors and other crediting enhancers and
banks and investors who have come to the far And
(10:19):
so when you add a project, a very large scale
project in Al Salvador which also closed last year, when
you add a second project in Barbados that was done
by E A B plus I D B and and
indeed the Galapagoz projects, now you're talking about six billion
right of refinancings, you know, four billion of new funding
(10:41):
and two billion for conservation and so you know, it's
it's a growing emerging if you will asset class if
if Jake agrees, uh, and it's such right, it's it's
very important to have the opposite of race to the bottom,
to have indeed a race to the top, so that
future projects and future sponsors continue to do these the
(11:03):
high quality, high level of ambition, and so through the
standards which was which was the result of the work
of many industry experts, and we're grateful to Jake and
others for participating and shaping those and providing valuable comments.
We wanted to a you know, codify our own learnings
for the benefit of the future TNC projects and other
(11:26):
NGO coalition projects, but also to provide a useful tool
to government, sovereign advisors, investment banks and investors, and even
in a sense even more importantly to the credit enhancers
that that Jake mentioned, you know, the likes of I
d B and ea B, the African Development Bank. So
that the credit enhancers, who in a way are standing
(11:50):
as gatekeepers for some of these projects, in that the
credit enhancements allow the refinancing of pre existing that at
lower rates. You know, know what to look for, and
so I think that we will continue to We see
this as a living document. We invite comments and critiques,
and we want to continue to update and improve it.
(12:13):
And also we want to continue to align it with
IKMA and other industry bodies. For example, IKMA recently published
their own use of Proceeds practice guide for nature focused projects. Uh.
And so that's you know, in a variant of green
bones where where specific users are funded as opposed to
(12:36):
as opposed to the refinancings that we're talking about here.
And so they invited us, they were alongside with WWF,
and we provided comments on that resource, on that document,
and so we were hopeful that we will receive their
comments on our documents such that you know, everyone in
the industry is aligned and singing from the same hymn sheet.
Speaker 1 (12:57):
Interesting. So, Jake, from your perspective, how did the new
standards ultimately improve investor confidence and do they address the
transparency or complexity concerns that might have kept some capital
on the sidelines.
Speaker 4 (13:12):
Historically, I think we've been very grateful to be part
of the coalition and to work to work on this
with the TNC and the other ng o s and
some of the you know, the excellent excellent investment banks
and structures in there. Notice capital and Chacking Morgan, we all,
we all kind of had a position, part part to
play in these in these standards, I think, you know
(13:33):
what's what's really important to state and and sure Sta
would agree that these standards are not to say that
every transaction must meet every single part that has been published.
They're just there should be viewed to as an excellent
base to work from. It's, you know, alongside the TNC's
toolkit for these kind of asset classes.
Speaker 5 (13:50):
It's probably you partner them both together.
Speaker 4 (13:53):
And if you're coming to this h DE conversion or
definature space with not so much kind of history or
contest or background, both of these kind of documents will
help you come to market. And I think it's helpful
for potential issuers like the sovereigns, potential structurers, some of
the new NGOs that may be entering the market. And
(14:14):
I think it's an excellent base in terms of the
transparency or compexity. I think it's really clear that this
is a nascent market, you know. I think all the
market participants to date have done a great job to
alleviate the competity concerns and there's still probably work to
be done, both in the structure, the reporting and things
like this. I think everyone agrees that, and I think
(14:36):
that's why Slav said it's a living and breathing document,
because I don't think we've got it perfect today. But
as more and more of these transactions come to market,
there will be efficiencies found and that will further improve
these standards. So I think I think it's a great
base to work from. I think it does help kind
of give an idea of what a structure should look
like and give that kind of transparency. But I do
(14:57):
think with more transactions coming to market and with a
light of the TNC and other NGOs in this space,
I think we will find further efficiencies and.
Speaker 5 (15:04):
Further ways it's better.
Speaker 4 (15:05):
But I think that the standards are definitely a great
place to work from.
Speaker 2 (15:09):
And Jake, you know, I mentioned earlier that LNG was
a cornerstone investor in Ecuador's twenty twenty three Klapaco Steel,
which was not only one of the largest but also
one of the most high profile different nature swaps to date,
but also LNG participated in the more recent December twenty
twenty four transaction focused on Amazon conservation. I'd love to
(15:31):
hear you know what stood out to you about these structures.
You mentioned earlier that conservation was really front and center
for these you know what made them compelling opportunities from
an investor perspective.
Speaker 5 (15:43):
Absolutely.
Speaker 4 (15:44):
I think again from our perspective, whilst they're both within Ecuador,
both transactions have their own merits, had separate NGOs I
had slightly different positive hopefully positive outcomes, and therefore we
kind of.
Speaker 5 (15:58):
Look at them, you know, differently.
Speaker 4 (16:00):
I wouldn't say just because they're both in equidor that
they were both viewed the same. In relation to the
Galapagos transaction, you know, we were very grateful to be
included quite early on into the process by then Credit
Suite now UBS, and that was run by Ramsey over there,
and we got to spend considerable time talking to both
the UBS team, the charity which is the PUPA Cheley
(16:23):
Ocean's Legacy Trust, I also the marine biologist, and I
think by able to having that kind of ability to
speak to those involving the project, you're able to hear
you why is this transaction important, how they're structuring the deal,
how they're going to monitor the outcomes while the milestones
have been selected this way, and it also kind of
(16:43):
gives you comfort that we are really able to kind
of do our full due diligence on the underlying the
project and the structure and the transaction and to get
comfortable on participating in such a transaction. And because of
that kind of early access and ability to work alongside
Credit Tweeze here, we were able to kind of get
a lot of comfort and a lot of internal and
(17:04):
external buying from our clients that yes, this is something
that we'd like to participate in. And likewise, by being
included quite early on in the process without getting into
the nuts and bolts of UK solvency too, we were
able to structure to work for a UK solventry to investor,
which is particularly important and it led to quite a
strong allocation on the Amazon trade. Again we were giving
(17:28):
our role in the space and again very grateful to
the CNC.
Speaker 5 (17:32):
Here.
Speaker 4 (17:33):
We are also able to take part in the first
land protection which we thought was very important. It's been
great that it's been related to ocean but even better
than how we can include terrestrial and land protection. And
again given our exposure and experience we did get to
spend some time speaking directly with the TNC team, probably
if you asked, probably slightly too many calls.
Speaker 5 (17:55):
We did have quite a few, but you know, that
kind of that kind of exposure.
Speaker 4 (17:59):
To the NGNGO, and you know, likewise, the Ecuadorian government
were very welcoming to having a call with us, and
again sitting there, sitting on a call and discussing, Okay,
why are we conserving this area, how we're going to
protect indigenous people, how has the milestones been.
Speaker 5 (18:12):
Set, what what are the risks here?
Speaker 4 (18:15):
And learning you know in that process that when Ecuador
puts something into conservation, that that's enshrined into law is
an incredible thing to know when we're approaching these transactions.
So I think we managed to kind of cover up
all of that conservation and kind of protection perspective and
familiarity of the product allows us to kind of take
(18:38):
part in these transactions. So yeah, I think they both
have their own compelling reasons why we've participated.
Speaker 5 (18:45):
I think the Galapadota.
Speaker 4 (18:46):
Is clearly a landmark and something franchise that you can
talk about. But I think likewise, participating in the Amazon
rainforests and protecting that is equally important sooth both our
excellent transactions, and we're very proud to be involved in.
Speaker 1 (19:00):
Both super interesting and slave From the TNC perspective, is
there a major difference between the structuring of you know,
the first deal which has Jake just mentioned focused on
ocean versus second which focused on land conservation and then
second are there elements of either or both of these
deals that are ultimately being baked into future deals.
Speaker 3 (19:22):
Eric, thanks so much for this question. Indeed, the Ecuador
project of TNC, PO Corridor and Mazzonico is one that
we are particularly proud of. It is the last one
that we closed just this past December, and it was
the largest one for TNC. So it involved one billion
dollar new issuance to refinance one point five billion of
(19:46):
Ecuadorian eurobonds, and it is the largest ever in terms
of conservation funding, so four hundred and sixty million dollars
of conservation funding. And because you know, it is the
first concert project focused on terrestrial areas for TNC, we
had to adapt the debt conversion model to account for that.
(20:10):
So the conservation commitments, the conservation projects that will be
funded through the unlocked financing are of course, you know,
driven by the need to protect the Ecuadorian Amazon, which
is an area of of course incredible domestic importance, regional importance,
and of worldwide significance. And in the design of the
(20:33):
project we incorporated feedback and involvement from indigenous communities and
local groups, which was es central to the effort. So
I think the bio Corridor amazonical shows the flexibility of
the model, how the basic de conversions model can be
adapted for different national circumstances and also for different types
(20:57):
of projects. After all zooming out, we're doing these projects
to account for what the governments, what the partner governments
and communities want to do. They're not something that the
TNC poses, quite the opposite. We plug in national development
strategies and national biodiversity action plans and financing plans, and
(21:22):
we help, you know, governments who are under lots of
that and other financial pressures to realize their own ambitions
through through the financial structures absolutely, but also through the
long term technical advice that the TNC provides.
Speaker 2 (21:37):
And going back to you, Jake, you know, when thinking
of reporting, what improvements have you seen and what still
needs to evolve to give investors clarity and confidence in
the impact of these transactions.
Speaker 4 (21:53):
Sure, absolutely, I think I've a few parents spoken about
kind of reporting and the reportant reporting.
Speaker 5 (22:00):
Look.
Speaker 4 (22:00):
I think, as I've mentioned already, the competitor of these
transactions to begin with has meant extra work for the
investors willing to do the legwork right. And I think
these transactions are heading in the right direction with the
likes of the TNC, and this the new coalition and
the standards will help and things are becoming more digestible
and attracting a greater number of diversity of participants. For example,
(22:23):
you know the most recent Equidor transaction and I think
one point at one point six times cover of the
of the of the transaction, which just goes to show
that investors are becoming more familiar, are becoming more welcoming
into the structure. But clearly look for the simplification in
reporting of the reporting are certainly going to be important
(22:43):
because I think lots of institutional investors, including ourselves, value
clarity on in terms of reporting and knowing exactly what
impacts are being delivered, how they're being delivered, how the
conservation fund is being managed. These things are clearly important
to us. It's not just simply buying the bond and
hoping for the best. It matters to our clients and
it matters to overall investors. I think you know, from
(23:08):
our perspective, the reporting has been the reporting that's been
at least made public.
Speaker 5 (23:12):
And there's two excellent examples.
Speaker 4 (23:14):
You have the Belize transaction that I think they're on
the second or third report now, and the tnc have
done a great job, as have the Belizean government on
the reporting. And in the Ecuador Colapagos trade it also
has some excellent reporting. And I think that it's clear
that the reports are doing a great job in firstly
providing transparency. It is telling institutional investors, hey, you know this,
(23:35):
this report is out there. It's public as well, so
it's not just for bondholders. I would reiterate that if
anyone listening is thinking, you know what, I wouldn't mindeeing
some of these reports. Go look at the Belize Fund,
I think, Bleasefund, dot BZ and Galapagos Life Fund. If
you google those will find them. And that provides the transparency.
So it's not just the bond holders. Everyone can review,
(23:56):
review that what's going on. But it's also you know,
it gives some kind of idea that the trades are
working and authenticity to the transaction. It's saying, look, not
only are they making these commitments, but they are ticking
off the milestones, They are raising the conservation funds, and
they are deploying it in line the guidelines that are
also public. So I absolutely would say go and look
(24:18):
at those reports.
Speaker 5 (24:19):
They're very detailed.
Speaker 4 (24:20):
They have some amazing pictures as well, so it always
helps you know. Not so many words, but in terms
of I think improvement in this space, I think, as
I just mentioned, a key one for me would be publicity.
I don't think there are many people that know that
you can go out and get these reports, and I
think if more people were able to find them, and
whether that's the work of the NGOs, maybe that needs
(24:42):
to be some kind of website hub that has all
of these trades.
Speaker 5 (24:45):
Up there and you can go on that.
Speaker 4 (24:47):
I don't know, and I'm sure Slav and others are
thinking about this, but I do think there shuld be
more publicity about the success of the transactions that are
done to date, and whether the transactions are widely publicly available,
making sure that people are viewing them, looking at them,
criticizing them as well. You know, these things can only
get better with kind of thoughts and advice from those
(25:08):
reading it, So I really recommend that people pick those
up and give some thoughts directly to the NGOs or
to the countries.
Speaker 5 (25:19):
And I think the last thing that would be really
helpful is that we see some stuarization and reporting. Now
that in itself is challenging.
Speaker 4 (25:27):
I think, you know, everyone would like to say that
every report someone looks familiar, so you know, if you
go to page ten, you'll see, you know, the impact,
and page fifteen will have the conservation pant. And I
think that is more challenging because I think the NGOs
as well as these transactions do have different outcomes that
they're monitoring, different things that they would like to report on,
and then it doesn't seem to be a best in
(25:47):
class kind of example of what everything should look like.
But likewise, as has already mentioned, there's a terrestrial transaction
and then likewise the Galapagos transaction, they report differently. You know,
one is about the impacts of specific area within the
gap that goes. One is reporting about clear rainforest and
river protection, And how do you get a report to
(26:07):
look like that but I think it's in a good place.
I would definitely recommend people go look at those reports,
and I think there's some work to be done, but
you know, I think all of the stakeholders here are
absolutely kind of align in making the reports as clear
as possible because ultimately they need more investments in these transactions.
Speaker 1 (26:27):
That's really interesting and so kind of following up on
this idea of being able to measure impact and reporting,
we're starting to see, you know, ripple effects of some
of the early deals that were made. So the Seychelles
back in twenty sixteen had one of the earliest transactions
and just this year signed into law a marine spatial
(26:48):
plan protecting over thirty percent of its waters. Slavin. In
your view, what does this tell us about the long
term value and applicability of these structures.
Speaker 3 (26:59):
Yeah, it's an interesting question because a lot of the
finance industry, and see if Jake Degrees, you know, is
obsessed with achieving financial clothes. And achieving financial clothes is
absolutely important, and it's appropriately lauded and celebrated and you
have your closing dinner and you get your hopefully your awards.
(27:23):
But from our perspective, and I know It's also true
for Jake is a truly mission oriented investor. You know,
the real action is in actually achieving results in the
season and on the ground, and that's what we're looking
forwards to. Fun fact, you know, the way, for example,
tnc approaches our strategic twenty thirty goals. You know, we
(27:45):
actually chock up very little at financial clothes because after all,
the work is ahead of us. It is when you know,
a partner government like the Schell's actually enshrines into law
and makes good on these commitments that we you know,
we at that point say, okay, we have contributed towards
our strategic goals. And so in the case of the Cchells, indeed,
(28:08):
you know, the deal closed, you know, just over ten
years ago. It was, if you will, one of the
predecessor or pilot if you will, projects in retrospect for
what was to follow. And we couldn't be happier with
the collaboration with you know, should we say, successive governments
(28:32):
in the cells as democracy, like all the other democracies
that we work with, you know, it has gone through
through different political cycles and that's okay, right, these are
projects of national importance there for the people of these countries,
and not for necessarily for the you know visionary politicians,
you know who may have signed the original deals and
(28:54):
so yeah, so look at the cells which fun fact,
the capital of the cchells, Victoria is the smallest capital
in terms of land mass of all the countries in
the entire world standing it, you know, Petit twenty square kilometers,
but their ocean space, their exclusive economic zone is one
(29:16):
point three five million square kilometers. It's a small island
developing state, right, but it's a big ocean economy, which
characterizes a lot of our partner governments as well in
the blue sphere. And so that is more than to
(29:37):
give you a sense of scale. That's more than twice
the size of France. And as you as you said,
through the process that we help them with, you know,
the original financing and then the technical support that we
provided over time, the use of of an independent conservation
Trust fund, which is an essential part of these structures
(29:57):
to basically receive the savings from the transaction and downstreamed
them towards you know, community projects. And of course you
know government spending on effective conservation. You know, now you
have you know, almost thirty three percent, almost a third
of that staggering, staggeringly large area being effectively protected, and
(30:22):
then the rest of their ocean you know, you know,
being being appropriately managed. So and that went from zero
point zero point zero four percent to thirty three percent.
So you know, I mentioned earlier in the context of
standards that what we're looking for is high level of ambition,
(30:43):
and I think that anyone, I think most observers will
agree that this is this was an ambitious, you know, commitment,
stretch goal, if you will, from practically zero to thirty percent,
which they exceeded. And it's in line in the case
of the SEACHE, both of course, with their national development plans,
which for an economy that's oriented towards tourism the fisheries,
(31:07):
of course the ocean is vital for them, but it's
also in line with global standards such as the Global
thirty by thirty and the Convention Biological Diversity. And so
we spent a good amount of time talking about the Cechells,
but the same is true for some of the other
some of our other projects, which of course are quite
a bit newer. The first commercial you know, that conversion
(31:30):
that we did of the if you will, the modern
era was in November of twenty twenty one, and that
was for police. So, as Jake said, now we have
a few years under a belt there and things are
going really well. Just to generalize, for all of TNC's
nature bonds projects, all of them are performing as expected.
(31:51):
The governments have made good on all their financial commitments.
Even more to the point, they have been in compliance
with all of the ambitious APIs. And that has been
the case in situations where you know, it has been
the same government, also in situations where there has been
government change, which sort of shows you the resilience of
(32:12):
these structures and their longevity. And hopefully we'll keep it
this way in the years to come.
Speaker 2 (32:18):
And final question to the both of you, for governments
or investors who are new to this space, what's your
message why should they pay attention to different nature swamps?
Speaker 4 (32:30):
Now, So I'll take this and then I'm sure Slave
can tell you really expand where we're coming from. So
from an investor perspective, you know, nature is significantly underfunded
and there is a growing debt issue emerging emerging economies.
As structurers like this are both helpful from an economic perspective,
(32:52):
but by replacing expensive debt with more long term cheaper
debt as a slash way described before, as well as
conserving key nature areas globally. And there are very very
few structures that can do this. And as lab has
already mentioned, this cannot solve all of the problems, but
it is a potential solution to some of some of
(33:12):
the problems. And you know, we Energy believe there is
a significant investment opportunity for institutional investors like ourselves to
be in this space and invest in emerging markets with
an investment grade credit risk. You know that delivers strong
commercial turns alongside positive and nature and social outcomes.
Speaker 5 (33:31):
You know, if you're.
Speaker 4 (33:32):
An investor thinking I'd love to be in emerging markets,
but you know it seems so it seems so risky,
these structures are a great great way to kind of
dip your toe into this space, get some exposure to
an emerging market for the protection of an IDV or
an e I B or an average do itent bank,
whatever it may be. And so I would say to investors,
(33:52):
you know, this is it's a great opportunity to do that.
And you know, Energy have been very privileged to be
one of the largest investors in the space currently. But
what I would say is that, you know, it's always
helpful to have more investors, and I've mentioned this a
few times on various panels. I think diversification with all
with all sectors, but in particular this sector, both in
(34:14):
turn investors, in terms of NGOs, in terms of governments,
in terms of development banks, is going to be essential
because you know, it's great that LERG may have a
thought that this is the best in class, and perhaps
another investor can build on that or could criticize our position,
and then working together we can improve the product. We
can improve the standards. And without having those additional diversification
(34:38):
in thought, whether that be an investor, with that being
a government, whatever it may be, we could be missing
out and improving this product. And the only way to
get there is to have to have more people involved.
So you know, my message to investors would be, do
take a look at the reporting. Do you if you
have any questions, do reach out to myself. I'm sure
that the TNC would be open happy to have ascussion.
(35:00):
I know, and definitely when these transactions come along, do
take some time consider it, think about how it fits
into your portfolio. Do take up the opportunities to speak
to the NGOs that are on working on these transactions,
to speak to the underlying government. And maybe it's not
the next trade, but it's the one after. But definitely
it's an exciting space to be in and it can
(35:22):
it can really make a difference.
Speaker 3 (35:24):
Thank you, Jake Coman. I agree I've ever said with
your with your comments and it's perfect because you're your
plea was was directed or pitch was directed at the
investors where say, I guess I'm going to take a
slightly different tech and and talk and address, if you will,
governments and credit enhancers. Now, why crediting hancers? Just as
(35:47):
a as a brief reminder to our to our listeners,
you know, credit enhancements are central to these structures in
allowing us to have credit substitution that would then drive
the savings that we discussed earlier so effectively. You know,
we're we're having now double A rated structures such as
(36:10):
the one in the ones in Ecuador or up for
sovereigns that are you know, shall we say, hovering around
single B and that and not necessarily the much elusive
grenium is what's you know, it's what's driving this this
ild compression and these savings, and so therefore crediting enhancement,
both public and private, is central and there's some amazing
(36:34):
news there if you look at the other recent project
that the TNC did just a month before the bill
cord or enzonycle closed, and that was in the Bahamas.
So that was a three hundred million dollars package that
involved the Inter American Development Bank, Yes, super important as
an anchor credit enhancer, but then also a builder's vision
(36:59):
which is the family of Lookas Walton at seventy million
and Access Excel, a private insurer at thirty million, which
shows something quite interesting, and that is that now you see,
you know, the crowding in of private credit enhancement alongside
with multilateral institutions. And so we're we're hopeful to see
(37:20):
more of that because we see that as a really
important way to structure these public private partnerships and achieve
fully wrapped, fully credit insured or guaranteed structures that in turn,
you know, can drive more of these savings. So in
terms of what to look for, I mentioned earlier the
(37:42):
flexibility of this structure, you know, so within TNC we
have applied them you know, for marine conservation, also for
the Amazonian rainforest, and so there could be a temptation
to stretch that too far and try to do that
conversions just for anything, you know, any of the of
the s dgs. And while of course you know all
(38:05):
of the sustainable development goals are important and most of
them are under funded, we have to ask ourselves the
question what is fit for purpose? You know what you
know horses are fit for what courses? And in some
instances with respect to let's say renewable energy and other
infrastructure projects, you know, there are other mechanisms to be
(38:28):
funding those, such as project finance, et cetera. And so therefore,
you know, I think we all have to be looking
at areas of greatest additionality where you know, which of
which s dgs, like the Ocean SDG, are the least funded,
and also you know, looking at the looking at the
sources and uses of funds if you will. You know
(38:50):
that conversions produce savings over a long period of time.
You know, so let's say thirty million dollars per year
over over fifteen year or twenty year period, and so
they are fit for purpose for conservation and biodiversity projects
that rely more on patient long term operating expenditures such
(39:11):
as for things such as you know, ranger salaries and
fuel for boats and electronic surveillance licenses and things like that.
And so if you that's that's you know, then makes
them appropriate and fit for purpose. And so if you're
looking then to fund the infrastructure projects that rely on
on very large or demand very large funding up front,
(39:32):
then perhaps a different tool would be would be more appropriate.
So this is all to say that that conversions can
will continue to play a very important role given the
funding gaps for nature, and given that overhang in the
global South, and you know, investing in nature underpins all
(39:54):
other investments. You know, I can quote, you know, any
any statistic to suggest that nature accounts for let's say,
fifty percent. It's a credible statistic, nature accounts for fifty
percent of global GDP, but in a sense it's a
meaningless statistic. I mean, imagine the society, the total societal
collapse if you know, if we don't have healthy soils
(40:15):
and access to water and clean air, and these things
almost don't need to be said, but it also merits
repeating that if you want you know, thriving market economies
and private investment, you need to have that underpinning of
nature that then you know, has the positive ripple effect
of community development and societal you know, I wouldn't quite
(40:40):
say harmony, but lack of outwar out you know, out
and out you know, conflict in many of these impoverished areas.
So you know, I guess my message is keep nature
in debt for nature, and you know, one one appropriate
way to ensure these positive outcomes for nature environments. We
(41:00):
used to continue to be doing these projects at high ambition,
high standard, high standards and indeed you know, as es
transparently as possible, which hopefully our recent standards will will
help ensure that.
Speaker 1 (41:15):
Wonderful Thank you Slave and Jake for joining us. I
think I like the idea of concluding on the idea
that investment in nature ultimately underpins all investments. I think
that's one of many key takeaways from the conversation. So
for those of us joining. For more information on debt
(41:36):
for nature, swaps and related ESG research, please head to
the environmental section of our ESG dashboard via bi spased
ESG go on the Bloomberg terminal and if you have
questions or topics you'd like us to cover, in future episodes.
Please reach out to us at ESG, currents at Bloomberg
dot net. Thanks for listening, and we'll see you next time.
ESG is constantly evolving. Over the years, it has shifted
from socially responsible investing to impact to sustainable finance. While
the terminology continues to change, what hasn't changed are the
underlying science, market pressures, and tangible physical and financial impacts
of the climate crisis, increasing regulatory scrutiny, and rising consumer expectations.
(00:33):
We aim to filter out the noise by speaking with
industry experts to identify what is really driving value. Welcome
to ESG Currents. I'm Eric Caine, director of ESG Research
for Bloomberg Intelligence, and.
Speaker 2 (00:46):
I'm Melanie rua senior ESG research associate, and we are
your hosts for today's episode. Today, we're exploring debt for
nature swaps, arising mechanism in sustainable finance that enables countries
to restructure sovereign debt in exchange for biodiversity or climate
related conservation commitments. While these transactions have historically been niche,
(01:08):
they are a gaining traction. Ecuador, Belize, Gabon, and Barbados
have all closed multi hundred million dollar deals in recent years,
unlocking significant funds for nature protection. Earlier this month, the
Nature Conservancy, alongside a multisector Advisory Group released the first
ever practice standards for debt conversion projects aimed at improving
(01:30):
the transparency, scalability, and impact of these complex but powerful
financial tools. Joining us today to unpack this evolution are
Slav Gatchev, who leads the Nature Conservancy's Sustainable Debt team
and has help structure six nature bond projects expected to
unlock over a billion dollars in funding for conservation, resilience
(01:52):
and community development. And we also have Ja Carper, Senior
investment manager for Alternative Debt Illegal In general, Ellen has
committed over a billion dollars to nature conservation and sustainable
debt development in emerging markets, with almost half a billion
dollars invested in debt for nature transactions across Police, Ecuador
and Gabon. Ellen g was also the cornerstone investor in
(02:15):
Ecuador's twenty twenty three Galapaco's debt for nature swap, one
of the largest transactions of its kind. Slav and Jake,
thank you for being here.
Speaker 3 (02:24):
Great to be here, Thanks for having us.
Speaker 2 (02:26):
Thanks so so, Slav, you've helped lead TNC's efforts on
some of the largest nature bonds today. Can you walk
us through what a debt for nature swap is and
how this model evolved into a scalable tool for conservation finance.
Speaker 3 (02:42):
Yeah, thank you very much for the opportunity and for
this question and the shout out to TNC. Indeed, we
we're proud to have pioneered the genre of, if you will,
contemporary debt conversions as we call them, to distinguish them
from some of the year government to government that for
(03:02):
nature swaps that were rather rather smaller in size. Once
you tackle commercial debt, then you're able to really scale
up like we've like we've shown so so just the
six T and C deals collectively refinanced three billion of
pre existing commercial debt, mostly eurobonds, most of which we
(03:26):
were trading at a steep discount and were otherwise unsustainable,
with two billion plus of new sustainable issuances on much
improved terms, longer tendards, lower interest rates principally, and more
to the point, generating as you mentioned, over a billion
dollars for conservation and community projects in these six countries.
(03:53):
In terms of the nature impact, which is what this
is really about. The impressive at the financial figure are
what really drives us is the is the nature and
biodiversity impact. We're talking about fifty three million hectors of
new protected areas both marine interrestrial through these projects, and
(04:14):
two hundred and forty two million hectors have improved management,
which really is as good as new, if you will.
In that a lot of national parks in the global
souther are so severely underfunded that there you know, parks
in name only or paper parks, if you will, And
(04:34):
we want to change that. And so why, you know,
why is all of that important? Well, to throw another figure,
eighty eight percent of the so called last chance ecosystems
are in countries with moderate to hide that distress in
the global seuth and if you look at the total
(04:56):
outstanding stock of commercial debt for developing countries of around
two trillion dollars, mostly eurobondes but also syndicated loans, close
to a third of that is a staggering number is
under some pressure or distress. That's also reflective in the
MB plus index, which tracks the performance of emerging market bonds,
(05:18):
where a scary number of issuers about still about a third.
So that's a double digit number of countries have market
rates yield to maturity exceeding ten percent, which effectively shuts
them out from the international capital markets. As the result
of all of that, there is we estimate there is
about a seven hundred billion annual funding gap for nature
(05:41):
and you know, so then you see the point of
these projects, right, which strike at the core of the
triple crisis, if you will, the debt, resilience and biodiversity crisis,
by helping countries refinance their debt and generate you know,
significant funding for conservation, no additional burden to their national treasure.
(06:03):
So the one billion dollar number that I mentioned earlier,
you know, otherwise, so that came at no additional cost
to national treasure. Is it didn't add to their death stock.
Otherwise they would have had to borrow it or scramble
to find that funding. So it's fit for purpose in
today's world. You know, whenever I answered that question, half
(06:26):
of me wants to appropriately tout the appropriateness of this structure.
In the other half, you know, once to caution that
these projects are not a panacea.
Speaker 1 (06:37):
Right.
Speaker 3 (06:38):
The seven hundred billion funding gap will not absolutely manifestly
will not be solved through that conversions alone. So a
lot more is needed by way of private investment, foreign
direct investment, more government to government lending, and indeed grants
and payments for ecosystem services, but certainly that for nature
conversions or an appropriate tool, and a scalable and powerful
(07:01):
one at that super interesting, So thanks Jake, Maybe a
question for you Ellen G has invested in four of
these transactions, more than any other institutional investor to date.
What draws the firm to these deals and how do
they fit within your broader investment strategy?
Speaker 4 (07:20):
Thanks, thanks Eric, and thanks for having me on the podcast. Look,
I think we believe these types of transactions are a
prime example of how we can achieve strong commercial returns
alongside delivering positive nature and social outcomes. Working with strong
NGOs such as the Nature Consurveyancy to help conserve critical
(07:43):
nature and by diversity areas globally is clearly very important
to us as an investor. And likewise, the strong credit
protections both within the structure and ultimately with the political
risk insurance and guarantees being provided by the likes of
Intermat Development Bank and other other institutions in the space,
All these combined to provide an attractive risk return dynamic.
(08:06):
When we're looking at this behalf of our clients and
clearly the other key thing that really helps us, you know,
kind of take part in these transactions. Is that conservation
is front and center, which is clear by the incorporation
of key milestones that can drive the outcomes desired and
working alongside with the nng o's at the TNC LNG
(08:28):
has committed over one billion dollars in private debt financing
for nature conservation and sustainable development and emerging markets and
debt conversions form a significant part of these investments and
we see that being a significant portion of the where
we continue to deploy it and likewise, we believe investors
can and should be capitalizing on the investment opportunity presented
(08:52):
in the four trillion dollar and your funding gap for
emerging markets to meet the un disabled dort and goals
and the potential for strong return and divestification that exposure
to emerging markets can provide. And just recently, Lang launched
its Nature and Social Outcome Strategy, which will leverage in
ad to financing methods such as these that benefit from
(09:13):
credit enhancement and aim to deliver strong commercial returns alongside
positive nature and social outcome.
Speaker 2 (09:19):
Thanks for sharing, Jake, and you know, going back to
u Slav the launch of the practice Standards for debt
conversion projects really marks a major milestone. What were the
key challenges these standards were designed to solve and how
do you see them shaping the next phase of deals?
Speaker 5 (09:37):
Yeah?
Speaker 3 (09:37):
Absolutely, I mean, like you rightfully said, this genre is
becoming more and more popular and we couldn't be more pleased.
As an NGL. We want to be super open sourced
and be building bridges and encouraging others to pursue ambitious,
high quality projects, and that is happening already. So I
(09:59):
quoted some of the UH financial and other figures associated
just with with TNC's six projects. But last year, for example,
you had several and before with with Jake's Galapagoz project,
you have several other sponsors and other crediting enhancers and
banks and investors who have come to the far And
(10:19):
so when you add a project, a very large scale
project in Al Salvador which also closed last year, when
you add a second project in Barbados that was done
by E A B plus I D B and and
indeed the Galapagoz projects, now you're talking about six billion
right of refinancings, you know, four billion of new funding
(10:41):
and two billion for conservation and so you know, it's
it's a growing emerging if you will asset class if
if Jake agrees, uh, and it's such right, it's it's
very important to have the opposite of race to the bottom,
to have indeed a race to the top, so that
future projects and future sponsors continue to do these the
(11:03):
high quality, high level of ambition, and so through the
standards which was which was the result of the work
of many industry experts, and we're grateful to Jake and
others for participating and shaping those and providing valuable comments.
We wanted to a you know, codify our own learnings
for the benefit of the future TNC projects and other
(11:26):
NGO coalition projects, but also to provide a useful tool
to government, sovereign advisors, investment banks and investors, and even
in a sense even more importantly to the credit enhancers
that that Jake mentioned, you know, the likes of I
d B and ea B, the African Development Bank. So
that the credit enhancers, who in a way are standing
(11:50):
as gatekeepers for some of these projects, in that the
credit enhancements allow the refinancing of pre existing that at
lower rates. You know, know what to look for, and
so I think that we will continue to We see
this as a living document. We invite comments and critiques,
and we want to continue to update and improve it.
(12:13):
And also we want to continue to align it with
IKMA and other industry bodies. For example, IKMA recently published
their own use of Proceeds practice guide for nature focused projects. Uh.
And so that's you know, in a variant of green
bones where where specific users are funded as opposed to
(12:36):
as opposed to the refinancings that we're talking about here.
And so they invited us, they were alongside with WWF,
and we provided comments on that resource, on that document,
and so we were hopeful that we will receive their
comments on our documents such that you know, everyone in
the industry is aligned and singing from the same hymn sheet.
Speaker 1 (12:57):
Interesting. So, Jake, from your perspective, how did the new
standards ultimately improve investor confidence and do they address the
transparency or complexity concerns that might have kept some capital
on the sidelines.
Speaker 4 (13:12):
Historically, I think we've been very grateful to be part
of the coalition and to work to work on this
with the TNC and the other ng o s and
some of the you know, the excellent excellent investment banks
and structures in there. Notice capital and Chacking Morgan, we all,
we all kind of had a position, part part to
play in these in these standards, I think, you know
(13:33):
what's what's really important to state and and sure Sta
would agree that these standards are not to say that
every transaction must meet every single part that has been published.
They're just there should be viewed to as an excellent
base to work from. It's, you know, alongside the TNC's
toolkit for these kind of asset classes.
Speaker 5 (13:50):
It's probably you partner them both together.
Speaker 4 (13:53):
And if you're coming to this h DE conversion or
definature space with not so much kind of history or
contest or background, both of these kind of documents will
help you come to market. And I think it's helpful
for potential issuers like the sovereigns, potential structurers, some of
the new NGOs that may be entering the market. And
(14:14):
I think it's an excellent base in terms of the
transparency or compexity. I think it's really clear that this
is a nascent market, you know. I think all the
market participants to date have done a great job to
alleviate the competity concerns and there's still probably work to
be done, both in the structure, the reporting and things
like this. I think everyone agrees that, and I think
(14:36):
that's why Slav said it's a living and breathing document,
because I don't think we've got it perfect today. But
as more and more of these transactions come to market,
there will be efficiencies found and that will further improve
these standards. So I think I think it's a great
base to work from. I think it does help kind
of give an idea of what a structure should look
like and give that kind of transparency. But I do
(14:57):
think with more transactions coming to market and with a
light of the TNC and other NGOs in this space,
I think we will find further efficiencies and.
Speaker 5 (15:04):
Further ways it's better.
Speaker 4 (15:05):
But I think that the standards are definitely a great
place to work from.
Speaker 2 (15:09):
And Jake, you know, I mentioned earlier that LNG was
a cornerstone investor in Ecuador's twenty twenty three Klapaco Steel,
which was not only one of the largest but also
one of the most high profile different nature swaps to date,
but also LNG participated in the more recent December twenty
twenty four transaction focused on Amazon conservation. I'd love to
(15:31):
hear you know what stood out to you about these structures.
You mentioned earlier that conservation was really front and center
for these you know what made them compelling opportunities from
an investor perspective.
Speaker 5 (15:43):
Absolutely.
Speaker 4 (15:44):
I think again from our perspective, whilst they're both within Ecuador,
both transactions have their own merits, had separate NGOs I
had slightly different positive hopefully positive outcomes, and therefore we
kind of.
Speaker 5 (15:58):
Look at them, you know, differently.
Speaker 4 (16:00):
I wouldn't say just because they're both in equidor that
they were both viewed the same. In relation to the
Galapagos transaction, you know, we were very grateful to be
included quite early on into the process by then Credit
Suite now UBS, and that was run by Ramsey over there,
and we got to spend considerable time talking to both
the UBS team, the charity which is the PUPA Cheley
(16:23):
Ocean's Legacy Trust, I also the marine biologist, and I
think by able to having that kind of ability to
speak to those involving the project, you're able to hear
you why is this transaction important, how they're structuring the deal,
how they're going to monitor the outcomes while the milestones
have been selected this way, and it also kind of
(16:43):
gives you comfort that we are really able to kind
of do our full due diligence on the underlying the
project and the structure and the transaction and to get
comfortable on participating in such a transaction. And because of
that kind of early access and ability to work alongside
Credit Tweeze here, we were able to kind of get
a lot of comfort and a lot of internal and
(17:04):
external buying from our clients that yes, this is something
that we'd like to participate in. And likewise, by being
included quite early on in the process without getting into
the nuts and bolts of UK solvency too, we were
able to structure to work for a UK solventry to investor,
which is particularly important and it led to quite a
strong allocation on the Amazon trade. Again we were giving
(17:28):
our role in the space and again very grateful to
the CNC.
Speaker 5 (17:32):
Here.
Speaker 4 (17:33):
We are also able to take part in the first
land protection which we thought was very important. It's been
great that it's been related to ocean but even better
than how we can include terrestrial and land protection. And
again given our exposure and experience we did get to
spend some time speaking directly with the TNC team, probably
if you asked, probably slightly too many calls.
Speaker 5 (17:55):
We did have quite a few, but you know, that
kind of that kind of exposure.
Speaker 4 (17:59):
To the NGNGO, and you know, likewise, the Ecuadorian government
were very welcoming to having a call with us, and
again sitting there, sitting on a call and discussing, Okay,
why are we conserving this area, how we're going to
protect indigenous people, how has the milestones been.
Speaker 5 (18:12):
Set, what what are the risks here?
Speaker 4 (18:15):
And learning you know in that process that when Ecuador
puts something into conservation, that that's enshrined into law is
an incredible thing to know when we're approaching these transactions.
So I think we managed to kind of cover up
all of that conservation and kind of protection perspective and
familiarity of the product allows us to kind of take
(18:38):
part in these transactions. So yeah, I think they both
have their own compelling reasons why we've participated.
Speaker 5 (18:45):
I think the Galapadota.
Speaker 4 (18:46):
Is clearly a landmark and something franchise that you can
talk about. But I think likewise, participating in the Amazon
rainforests and protecting that is equally important sooth both our
excellent transactions, and we're very proud to be involved in.
Speaker 1 (19:00):
Both super interesting and slave From the TNC perspective, is
there a major difference between the structuring of you know,
the first deal which has Jake just mentioned focused on
ocean versus second which focused on land conservation and then
second are there elements of either or both of these
deals that are ultimately being baked into future deals.
Speaker 3 (19:22):
Eric, thanks so much for this question. Indeed, the Ecuador
project of TNC, PO Corridor and Mazzonico is one that
we are particularly proud of. It is the last one
that we closed just this past December, and it was
the largest one for TNC. So it involved one billion
dollar new issuance to refinance one point five billion of
(19:46):
Ecuadorian eurobonds, and it is the largest ever in terms
of conservation funding, so four hundred and sixty million dollars
of conservation funding. And because you know, it is the
first concert project focused on terrestrial areas for TNC, we
had to adapt the debt conversion model to account for that.
(20:10):
So the conservation commitments, the conservation projects that will be
funded through the unlocked financing are of course, you know,
driven by the need to protect the Ecuadorian Amazon, which
is an area of of course incredible domestic importance, regional importance,
and of worldwide significance. And in the design of the
(20:33):
project we incorporated feedback and involvement from indigenous communities and
local groups, which was es central to the effort. So
I think the bio Corridor amazonical shows the flexibility of
the model, how the basic de conversions model can be
adapted for different national circumstances and also for different types
(20:57):
of projects. After all zooming out, we're doing these projects
to account for what the governments, what the partner governments
and communities want to do. They're not something that the
TNC poses, quite the opposite. We plug in national development
strategies and national biodiversity action plans and financing plans, and
(21:22):
we help, you know, governments who are under lots of
that and other financial pressures to realize their own ambitions
through through the financial structures absolutely, but also through the
long term technical advice that the TNC provides.
Speaker 2 (21:37):
And going back to you, Jake, you know, when thinking
of reporting, what improvements have you seen and what still
needs to evolve to give investors clarity and confidence in
the impact of these transactions.
Speaker 4 (21:53):
Sure, absolutely, I think I've a few parents spoken about
kind of reporting and the reportant reporting.
Speaker 5 (22:00):
Look.
Speaker 4 (22:00):
I think, as I've mentioned already, the competitor of these
transactions to begin with has meant extra work for the
investors willing to do the legwork right. And I think
these transactions are heading in the right direction with the
likes of the TNC, and this the new coalition and
the standards will help and things are becoming more digestible
and attracting a greater number of diversity of participants. For example,
(22:23):
you know the most recent Equidor transaction and I think
one point at one point six times cover of the
of the of the transaction, which just goes to show
that investors are becoming more familiar, are becoming more welcoming
into the structure. But clearly look for the simplification in
reporting of the reporting are certainly going to be important
(22:43):
because I think lots of institutional investors, including ourselves, value
clarity on in terms of reporting and knowing exactly what
impacts are being delivered, how they're being delivered, how the
conservation fund is being managed. These things are clearly important
to us. It's not just simply buying the bond and
hoping for the best. It matters to our clients and
it matters to overall investors. I think you know, from
(23:08):
our perspective, the reporting has been the reporting that's been
at least made public.
Speaker 5 (23:12):
And there's two excellent examples.
Speaker 4 (23:14):
You have the Belize transaction that I think they're on
the second or third report now, and the tnc have
done a great job, as have the Belizean government on
the reporting. And in the Ecuador Colapagos trade it also
has some excellent reporting. And I think that it's clear
that the reports are doing a great job in firstly
providing transparency. It is telling institutional investors, hey, you know this,
(23:35):
this report is out there. It's public as well, so
it's not just for bondholders. I would reiterate that if
anyone listening is thinking, you know what, I wouldn't mindeeing
some of these reports. Go look at the Belize Fund,
I think, Bleasefund, dot BZ and Galapagos Life Fund. If
you google those will find them. And that provides the transparency.
So it's not just the bond holders. Everyone can review,
(23:56):
review that what's going on. But it's also you know,
it gives some kind of idea that the trades are
working and authenticity to the transaction. It's saying, look, not
only are they making these commitments, but they are ticking
off the milestones, They are raising the conservation funds, and
they are deploying it in line the guidelines that are
also public. So I absolutely would say go and look
(24:18):
at those reports.
Speaker 5 (24:19):
They're very detailed.
Speaker 4 (24:20):
They have some amazing pictures as well, so it always
helps you know. Not so many words, but in terms
of I think improvement in this space, I think, as
I just mentioned, a key one for me would be publicity.
I don't think there are many people that know that
you can go out and get these reports, and I
think if more people were able to find them, and
whether that's the work of the NGOs, maybe that needs
(24:42):
to be some kind of website hub that has all
of these trades.
Speaker 5 (24:45):
Up there and you can go on that.
Speaker 4 (24:47):
I don't know, and I'm sure Slav and others are
thinking about this, but I do think there shuld be
more publicity about the success of the transactions that are
done to date, and whether the transactions are widely publicly available,
making sure that people are viewing them, looking at them,
criticizing them as well. You know, these things can only
get better with kind of thoughts and advice from those
(25:08):
reading it, So I really recommend that people pick those
up and give some thoughts directly to the NGOs or
to the countries.
Speaker 5 (25:19):
And I think the last thing that would be really
helpful is that we see some stuarization and reporting. Now
that in itself is challenging.
Speaker 4 (25:27):
I think, you know, everyone would like to say that
every report someone looks familiar, so you know, if you
go to page ten, you'll see, you know, the impact,
and page fifteen will have the conservation pant. And I
think that is more challenging because I think the NGOs
as well as these transactions do have different outcomes that
they're monitoring, different things that they would like to report on,
and then it doesn't seem to be a best in
(25:47):
class kind of example of what everything should look like.
But likewise, as has already mentioned, there's a terrestrial transaction
and then likewise the Galapagos transaction, they report differently. You know,
one is about the impacts of specific area within the
gap that goes. One is reporting about clear rainforest and
river protection, And how do you get a report to
(26:07):
look like that but I think it's in a good place.
I would definitely recommend people go look at those reports,
and I think there's some work to be done, but
you know, I think all of the stakeholders here are
absolutely kind of align in making the reports as clear
as possible because ultimately they need more investments in these transactions.
Speaker 1 (26:27):
That's really interesting and so kind of following up on
this idea of being able to measure impact and reporting,
we're starting to see, you know, ripple effects of some
of the early deals that were made. So the Seychelles
back in twenty sixteen had one of the earliest transactions
and just this year signed into law a marine spatial
(26:48):
plan protecting over thirty percent of its waters. Slavin. In
your view, what does this tell us about the long
term value and applicability of these structures.
Speaker 3 (26:59):
Yeah, it's an interesting question because a lot of the
finance industry, and see if Jake Degrees, you know, is
obsessed with achieving financial clothes. And achieving financial clothes is
absolutely important, and it's appropriately lauded and celebrated and you
have your closing dinner and you get your hopefully your awards.
(27:23):
But from our perspective, and I know It's also true
for Jake is a truly mission oriented investor. You know,
the real action is in actually achieving results in the
season and on the ground, and that's what we're looking
forwards to. Fun fact, you know, the way, for example,
tnc approaches our strategic twenty thirty goals. You know, we
(27:45):
actually chock up very little at financial clothes because after all,
the work is ahead of us. It is when you know,
a partner government like the Schell's actually enshrines into law
and makes good on these commitments that we you know,
we at that point say, okay, we have contributed towards
our strategic goals. And so in the case of the Cchells, indeed,
(28:08):
you know, the deal closed, you know, just over ten
years ago. It was, if you will, one of the
predecessor or pilot if you will, projects in retrospect for
what was to follow. And we couldn't be happier with
the collaboration with you know, should we say, successive governments
(28:32):
in the cells as democracy, like all the other democracies
that we work with, you know, it has gone through
through different political cycles and that's okay, right, these are
projects of national importance there for the people of these countries,
and not for necessarily for the you know visionary politicians,
you know who may have signed the original deals and
(28:54):
so yeah, so look at the cells which fun fact,
the capital of the cchells, Victoria is the smallest capital
in terms of land mass of all the countries in
the entire world standing it, you know, Petit twenty square kilometers,
but their ocean space, their exclusive economic zone is one
(29:16):
point three five million square kilometers. It's a small island
developing state, right, but it's a big ocean economy, which
characterizes a lot of our partner governments as well in
the blue sphere. And so that is more than to
(29:37):
give you a sense of scale. That's more than twice
the size of France. And as you as you said,
through the process that we help them with, you know,
the original financing and then the technical support that we
provided over time, the use of of an independent conservation
Trust fund, which is an essential part of these structures
(29:57):
to basically receive the savings from the transaction and downstreamed
them towards you know, community projects. And of course you
know government spending on effective conservation. You know, now you
have you know, almost thirty three percent, almost a third
of that staggering, staggeringly large area being effectively protected, and
(30:22):
then the rest of their ocean you know, you know,
being being appropriately managed. So and that went from zero
point zero point zero four percent to thirty three percent.
So you know, I mentioned earlier in the context of
standards that what we're looking for is high level of ambition,
(30:43):
and I think that anyone, I think most observers will
agree that this is this was an ambitious, you know, commitment,
stretch goal, if you will, from practically zero to thirty percent,
which they exceeded. And it's in line in the case
of the SEACHE, both of course, with their national development plans,
which for an economy that's oriented towards tourism the fisheries,
(31:07):
of course the ocean is vital for them, but it's
also in line with global standards such as the Global
thirty by thirty and the Convention Biological Diversity. And so
we spent a good amount of time talking about the Cechells,
but the same is true for some of the other
some of our other projects, which of course are quite
a bit newer. The first commercial you know, that conversion
(31:30):
that we did of the if you will, the modern
era was in November of twenty twenty one, and that
was for police. So, as Jake said, now we have
a few years under a belt there and things are
going really well. Just to generalize, for all of TNC's
nature bonds projects, all of them are performing as expected.
(31:51):
The governments have made good on all their financial commitments.
Even more to the point, they have been in compliance
with all of the ambitious APIs. And that has been
the case in situations where you know, it has been
the same government, also in situations where there has been
government change, which sort of shows you the resilience of
(32:12):
these structures and their longevity. And hopefully we'll keep it
this way in the years to come.
Speaker 2 (32:18):
And final question to the both of you, for governments
or investors who are new to this space, what's your
message why should they pay attention to different nature swamps?
Speaker 4 (32:30):
Now, So I'll take this and then I'm sure Slave
can tell you really expand where we're coming from. So
from an investor perspective, you know, nature is significantly underfunded
and there is a growing debt issue emerging emerging economies.
As structurers like this are both helpful from an economic perspective,
(32:52):
but by replacing expensive debt with more long term cheaper
debt as a slash way described before, as well as
conserving key nature areas globally. And there are very very
few structures that can do this. And as lab has
already mentioned, this cannot solve all of the problems, but
it is a potential solution to some of some of
(33:12):
the problems. And you know, we Energy believe there is
a significant investment opportunity for institutional investors like ourselves to
be in this space and invest in emerging markets with
an investment grade credit risk. You know that delivers strong
commercial turns alongside positive and nature and social outcomes.
Speaker 5 (33:31):
You know, if you're.
Speaker 4 (33:32):
An investor thinking I'd love to be in emerging markets,
but you know it seems so it seems so risky,
these structures are a great great way to kind of
dip your toe into this space, get some exposure to
an emerging market for the protection of an IDV or
an e I B or an average do itent bank,
whatever it may be. And so I would say to investors,
(33:52):
you know, this is it's a great opportunity to do that.
And you know, Energy have been very privileged to be
one of the largest investors in the space currently. But
what I would say is that, you know, it's always
helpful to have more investors, and I've mentioned this a
few times on various panels. I think diversification with all
with all sectors, but in particular this sector, both in
(34:14):
turn investors, in terms of NGOs, in terms of governments,
in terms of development banks, is going to be essential
because you know, it's great that LERG may have a
thought that this is the best in class, and perhaps
another investor can build on that or could criticize our position,
and then working together we can improve the product. We
can improve the standards. And without having those additional diversification
(34:38):
in thought, whether that be an investor, with that being
a government, whatever it may be, we could be missing
out and improving this product. And the only way to
get there is to have to have more people involved.
So you know, my message to investors would be, do
take a look at the reporting. Do you if you
have any questions, do reach out to myself. I'm sure
that the TNC would be open happy to have ascussion.
(35:00):
I know, and definitely when these transactions come along, do
take some time consider it, think about how it fits
into your portfolio. Do take up the opportunities to speak
to the NGOs that are on working on these transactions,
to speak to the underlying government. And maybe it's not
the next trade, but it's the one after. But definitely
it's an exciting space to be in and it can
(35:22):
it can really make a difference.
Speaker 3 (35:24):
Thank you, Jake Coman. I agree I've ever said with
your with your comments and it's perfect because you're your
plea was was directed or pitch was directed at the
investors where say, I guess I'm going to take a
slightly different tech and and talk and address, if you will,
governments and credit enhancers. Now, why crediting hancers? Just as
(35:47):
a as a brief reminder to our to our listeners,
you know, credit enhancements are central to these structures in
allowing us to have credit substitution that would then drive
the savings that we discussed earlier so effectively. You know,
we're we're having now double A rated structures such as
(36:10):
the one in the ones in Ecuador or up for
sovereigns that are you know, shall we say, hovering around
single B and that and not necessarily the much elusive
grenium is what's you know, it's what's driving this this
ild compression and these savings, and so therefore crediting enhancement,
both public and private, is central and there's some amazing
(36:34):
news there if you look at the other recent project
that the TNC did just a month before the bill
cord or enzonycle closed, and that was in the Bahamas.
So that was a three hundred million dollars package that
involved the Inter American Development Bank, Yes, super important as
an anchor credit enhancer, but then also a builder's vision
(36:59):
which is the family of Lookas Walton at seventy million
and Access Excel, a private insurer at thirty million, which
shows something quite interesting, and that is that now you see,
you know, the crowding in of private credit enhancement alongside
with multilateral institutions. And so we're we're hopeful to see
(37:20):
more of that because we see that as a really
important way to structure these public private partnerships and achieve
fully wrapped, fully credit insured or guaranteed structures that in turn,
you know, can drive more of these savings. So in
terms of what to look for, I mentioned earlier the
(37:42):
flexibility of this structure, you know, so within TNC we
have applied them you know, for marine conservation, also for
the Amazonian rainforest, and so there could be a temptation
to stretch that too far and try to do that
conversions just for anything, you know, any of the of
the s dgs. And while of course you know all
(38:05):
of the sustainable development goals are important and most of
them are under funded, we have to ask ourselves the
question what is fit for purpose? You know what you
know horses are fit for what courses? And in some
instances with respect to let's say renewable energy and other
infrastructure projects, you know, there are other mechanisms to be
(38:28):
funding those, such as project finance, et cetera. And so therefore,
you know, I think we all have to be looking
at areas of greatest additionality where you know, which of
which s dgs, like the Ocean SDG, are the least funded,
and also you know, looking at the looking at the
sources and uses of funds if you will. You know
(38:50):
that conversions produce savings over a long period of time.
You know, so let's say thirty million dollars per year
over over fifteen year or twenty year period, and so
they are fit for purpose for conservation and biodiversity projects
that rely more on patient long term operating expenditures such
(39:11):
as for things such as you know, ranger salaries and
fuel for boats and electronic surveillance licenses and things like that.
And so if you that's that's you know, then makes
them appropriate and fit for purpose. And so if you're
looking then to fund the infrastructure projects that rely on
on very large or demand very large funding up front,
(39:32):
then perhaps a different tool would be would be more appropriate.
So this is all to say that that conversions can
will continue to play a very important role given the
funding gaps for nature, and given that overhang in the
global South, and you know, investing in nature underpins all
(39:54):
other investments. You know, I can quote, you know, any
any statistic to suggest that nature accounts for let's say,
fifty percent. It's a credible statistic, nature accounts for fifty
percent of global GDP, but in a sense it's a
meaningless statistic. I mean, imagine the society, the total societal
collapse if you know, if we don't have healthy soils
(40:15):
and access to water and clean air, and these things
almost don't need to be said, but it also merits
repeating that if you want you know, thriving market economies
and private investment, you need to have that underpinning of
nature that then you know, has the positive ripple effect
of community development and societal you know, I wouldn't quite
(40:40):
say harmony, but lack of outwar out you know, out
and out you know, conflict in many of these impoverished areas.
So you know, I guess my message is keep nature
in debt for nature, and you know, one one appropriate
way to ensure these positive outcomes for nature environments. We
(41:00):
used to continue to be doing these projects at high ambition,
high standard, high standards and indeed you know, as es
transparently as possible, which hopefully our recent standards will will
help ensure that.
Speaker 1 (41:15):
Wonderful Thank you Slave and Jake for joining us. I
think I like the idea of concluding on the idea
that investment in nature ultimately underpins all investments. I think
that's one of many key takeaways from the conversation. So
for those of us joining. For more information on debt
(41:36):
for nature, swaps and related ESG research, please head to
the environmental section of our ESG dashboard via bi spased
ESG go on the Bloomberg terminal and if you have
questions or topics you'd like us to cover, in future episodes.
Please reach out to us at ESG, currents at Bloomberg
dot net. Thanks for listening, and we'll see you next time.
Host
Eric Kane
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