Some organisations have reserved the debt-swap term only for bilateral debt forgiveness. Historical examples include the US forgiving chunks of debt owed by Costa Rica and Indonesia in the 2000s in exchange for commitments to fund tropical forest conservations. In 2023, Portugal agreed to convert the debt of former colony Cabo Verde into a fund for climate and environmental development projects.
The Cabo Verde swap represented the first instance of a new approach piloted by the International Institute for Environment and Development (IIED) — a concerted effort to improve on past structures that lacked transparency and removed agency from developing countries. Rather than having funds managed by international non-governmental organisations (INGOs), these DfNS use the debtor state’s own government systems. Climate and nature KPIs are set in agreement with the debtor government and - just as importantly - local stakeholders. An ‘all-creditor’ approach aims to provide debt relief at scale and lower transaction costs.
“The Cabo Verde KPIs focussed on installing renewable energy and marine conservation,” says Laura Kelly, director of the IIED’s Shaping Sustainable Markets group. “It's an approach that links swaps to a country’s own development priorities.”
The IIED has urged other G20 nations to replicate the Cabo Verde example. In the meantime, interest in DfNS is growing rapidly. In December, the United Nations Economic Commission for Africa (ECA) described DfNS as a “game changer” for The Democratic Republic of Congo (DRC). The DRC is analysing its debt portfolio and identifying potential projects - including conservation, agriculture and electric vehicle projects - that could form part of a DfNS.
But outside support will be key to furthering the use of well-designed DfNS, which require a huge amount of effort. The IIED’s work in Cabo Verde and Senegal, says Kelly, involved coordination with finance ministries and debt management offices, sovereign debt advisors, the non-profit group Bankers Without Boundaries and local NGOs. “There is the challenge of coordination,” she says. “But if you can solve that, these swaps can have a significant impact.”
Multilaterals have a valuable role to play - and not just in providing funding. The ECA is building a Sustainable Sovereign Debt Hub specifically to help countries refinance existing debt or issue new climate-aligned debt using KPIs. The African Development Bank (AfDB) has its Legal Support Facility - originally set up to help heavily indebted countries litigate with vulture funds.
There is progress too when it comes to monitoring, something that has been overlooked in the past. Latin America, for instance, has a history of DfNS that have further marginalised already vulnerable minority groups. As part of its reform agenda, the World Bank is putting significant resources into helping countries measure impact - including a dedicated reporting dashboard.
Momentum builds
As the ECA’s proposed hub indicates, DfNS can also include refinancing existing debt. US-headquartered environmental organisation The Nature Conservancy (TNC) works on such agreements but refers to them as nature bond transactions rather than DfNS. Its most recent African project came in 2023, when it helped Gabon refinance US$500m of its national debt through a blue bond transaction - freeing up over US$160m for ocean conservation.
“I’ve been at TNC for almost 20 years and this [nature bonds] is the most exciting thing I’ve ever had the chance to work on,” says Melissa Garvey, TNC’s global director of nature bonds. The group has mapped out what it calls “last chance ecosystems” - where biodiversity is at a tipping point. Garvey says 88% of these ecosystems are in countries that have moderate to high levels of debt distress. Where such countries have willing governments and there are development partners to collaborate with, there is the potential for nature bond projects.
Just as with bilateral swaps - coordination and collaboration is essential. TNC is investigating how nature bonds could help preserve thousands of miles of African coastline stretching from Angola down through Namibia and South Africa. Joining with the Blue Nature Alliance and Benguela Current Convention Secretariat, TNC has helped form the Blue Benguela Partnership - dedicated to strengthening ocean governance and identifying sustainable financing opportunities.
This new generation of nature transactions is creating momentum and greater familiarity among debt holders. “Investors are becoming much more familiar with the structures,” says Slav Gatchev, TNC’s managing director for sustainable debt, pointing to “repeat customers” like Nuveen Asset Management Legal & General.
“We will continue to build on this momentum so that asset managers, insurance companies and other institutional investors understand these structures and continue to support them, [creating] more liquidity and more interest and lower spreads in the future,” he says.