Transparency and debt-for-nature swaps: towards a social license approach.  

José Ignacio Hernández G. / 24-01-2025

Source: National Geographic

Debt-for-nature (DFN) swaps are, in simple terms, debt restructuring transactions in which debt relief is used to finance environmental projects. As explained in an early paper by Michael Occhiolini (IMF), DFN aims to benefit the debtor country, creditors, and international environmental organizations. These international organizations can reduce coordination costs for debtors and creditors, enhancing the chances of successful debt restructuring.

Climate change adaptation and mitigation policies are boosting DFN. In 2022, for instance, Belize signed a DFN involving The Nature Conservancy, which has paved the way for other similar strategies. One of those cases -Ecuador´s 2023 DNF—has underscored the relevance of transparency in implementing those deals. 

There has been a growing interest in combating opaque debt and promoting transparency throughout the debt lifecycle. The DFF introduces a new challenge for transparency concerning the environmental project that will receive funding.

The 2023 DFN deal in Ecuador follows a standard blueprint. On one level, Ecuador renegotiated USD 1.6 billion worth of bonds at a discount, offering relief estimated at USD 1.1 billion in debt service for the coming year. Conversely, approximately USD 450 million was allocated to finance the Galapagos Life Fund. To back this environmental initiative, global entities like the Development Finance Corporation and the Inter-American Development Bank offered resources that enabled the restructuring. The debt restructuring would have encountered significant challenges if the environmental project had not been included. 

Nevertheless, the environmental aspects of debt restructuring heightened the relevance of the transparency standards. In addition to the existing transparency standards applicable to the debt restructuring, it was also necessary to promote transparency related to the Galapagos Life Fund, which includes engaging and consulting with local communities.

This is precisely the complaint raised by the Centro de Derechos Económicos y Sociales (CDES) and other organizations in Ecuador, which questioned the transparency and involvement of local communities in the Galapagos Life Fund. In November 2024, the Inter-American Development Bankfacilitated an agreement between the government and local communities to improve transparency and governance in the fund’s management. 

The key takeaway is that DFN swaps involve more than just governments, creditors, and international organizations; they also include local communities impacted by the environmental projects funded by debt relief. In Latin America, both constitutional and inter-American law escalate the demands for transparency, accountability, and citizen engagement, particularly among vulnerable groups like indigenous peoples. Therefore, debt restructuring must not only adhere to transparency requirements, but the environmental projects linked to DFN should also uphold stringent transparency standards. 

One possible solution to meet those standards is to introduce “social license” institutions in DFN. A “social license” refers to governance rules reinforcing the participation and involvement of local communities affected by extractive projects. Similarly, DFN should include a social license, incorporating local communities into the design and implementation of the swap. That license could also enhance debt transparency, allowing civil society to participate in debt restructuring that facilitates the finance of environmental projects. 

Enhancing engagement with civil society can also help expand the DFN model to other social and economic rights initiatives, such as debt-for-education swaps. If the beneficiaries of the social projects linked to the debt swap are involved, those swaps will be more effective.