I. INTRODUCTION
Developed countries' focus on stability policies rather than development-oriented policies has enabled them to address global issues such as the climate crisis, environmental degradation, and the depletion of energy resources. Developing countries with high energy consumption, on the other hand, have remained inadequate in tackling ecological problems due to reasons such as limited financial resources, lack of qualified human resources, weak institutional capacity, insufficient technology and infrastructure, and heavy external debt burdens. The growing environmental sensitivity in developed countries and the need for resources in developing countries have paved the way for the emergence of a new financing mechanism. This mechanism, referred to as the debt-for-nature swap, entails the cancellation of a developing country's external debt in return for undertaking local investments aimed at environmental protection measures.
Emerging in the 1980s and still in practice today as an alternative debt restructuring mechanism, debt-for-nature swaps involve, on one side, the indebted developing country, and on the other side, the creditor developed country. In addition, special purpose vehicles act as third-party fund providers alongside the creditor country.
II. FUNDAMENTAL PRINCIPLES
1. How Does the Debt-for-Nature Swap Mechanism Operate?
Developing countries, in line with their rapid economic growth objectives, prioritize industrial investments, mining activities, and infrastructure projects. However, poverty, housing shortages, and deficiencies in healthcare and education push environmental concerns into the background. As a result, long-term costs emerge, such as the rapid depletion of natural resources, the degradation of ecosystems, and the increase in carbon emissions and air, water, and soil pollution due to a fossil fuel–based growth model.
Although the environmental and economic costs that arise may initially appear to affect only the ecosystems of developing countries, the global nature of issues such as climate change, biodiversity loss, and the depletion of natural resources means that, in the long term, these costs directly impact on the economies of developed countries and the world as a whole.
At the core of the debt-for-nature swap mechanism lies the partial relief of a debtor state's external debt in exchange for environmental investments. In this process, special purpose vehicles or financial institutions are often involved. These entities either purchase the debtor country's external debt from secondary markets at discounted prices or acquire it through negotiations with creditor states. Subsequently, such debt is restructured in local currency under an agreement concluded with the debtor country's central bank or government. In this way, instead of repaying the debt in foreign currency, the country undertakes to allocate the same amount to projects such as environmental protection, forest sustainability, biodiversity, or renewable energy.
Depending on the number of parties involved, there are two main types of mechanisms:
- Triangular Swap: Special purpose vehicles purchase debt from commercial banks or the secondary market at a discounted price; in return for the debtor country's commitment to environmental projects, this debt is either cancelled or restructured. In this process, the debtor country undertakes to implement environmental projects.
- Bilateral Swap: The creditor state directly cancels or restructures part of the debt owed by the debtor state; in exchange, the debtor country agrees to implement environmental protection measures.
2. How Do the Parties Benefit from the Debt-for-Nature Swap Mechanism
The debt-for-nature swap is a mechanism that has long been on the agenda between developing countries burdened with external debt and developed countries planning their investments in line with sustainable development objectives and has been the subject of various agreements. The reason for choosing this model is not solely ecological concerns. For developing countries, debt-for-nature swaps not only provide debt relief but also create a financing opportunity that supports their development plans.
From the perspective of creditor countries, strategic and environmental advantages include the liquidation of debts that are difficult to recover, the strengthening of economic and diplomatic relations with the debtor country, and the fulfilment of international obligations. Accordingly, the debt-for-nature swap constitutes a sustainability-oriented financial instrument that provides long-term benefits for the parties.
For companies and investors operating in the energy sector, this mechanism carries particular importance. The funds made available under debt-for-nature swaps can be used to finance renewable energy projects, energy efficiency investments, and carbon emission reduction programs. This not only enhances companies' alignment with ESG criteria but also makes a strong contribution to their sustainability reporting.
3. Can the Debt-for-Nature Swap Mechanism Also Be Considered a Financing Model for Companies?
From a historical perspective, although the debt-for-nature swap mechanism initially emerged as a restructuring method, the diversified and evolving models over time demonstrate that the mechanism can also be regarded as a micro-scale green financing instrument or as an indirect financing model. Through environmental funds established under states' debt-for-nature swap agreements or tenders opened for green projects, access to financing sources can be provided for companies. More recently, the integration of the mechanism with green bonds, carbon credits, and insurance products has enabled the private sector to participate more actively in the process.
For instance, in transactions carried out in Belize, the banking sector undertook financial intermediation and guarantor functions, and the restructured debt was channeled into the protection of marine ecosystems through the issuance of a Blue Bond. In the case of Ecuador, the insurance sector intervened through political risk insurance and guarantees, with the funds directed to conservation projects in the Galápagos Islands. Similarly, in the agreement concluded in Gabon, both the banking and insurance sectors played a role in restructuring USD 500 million of debt, with approximately USD 125 million allocated to environmental projects.
These examples reveal that debt-for-nature swaps are not only a means of alleviating public debt but also a tool for providing resources for sustainable projects through financial institutions and insurance companies. Although renewable energy companies are not direct parties to such agreements, the environmental funds and tender projects generated because of these mechanisms create new investment and financing opportunities for them. Thus, debt-for-nature swaps, albeit indirectly, constitute a significant instrument for green financing in the energy sector.
4. What Benefits Do Debt-for-Nature Swaps Provide in Terms of ESG Criteria and Sustainability Reporting?
Debt-for-nature swaps are financial mechanisms that directly contribute to the environmental dimension of ESG criteria. The funds established within this framework are channeled into areas such as forest conservation, biodiversity support, and carbon emission reduction. These outcomes align with the Nationally Determined Contributions (NDCs) submitted by countries under the Paris Agreement, adopted in 2015 under the United Nations Framework Convention on Climate Change (UNFCCC), and may also fall within the categories of sustainable activities defined in regulations such as the European Union's Green Deal and the EU Taxonomy.
There are also significant benefits in terms of the social and governance dimensions. Projects involving local communities generate social impacts such as job creation, the promotion of sustainable agricultural practices, and improved access to energy. These impacts are consistent with the United Nations Sustainable Development Goals and the International Labor Organization's just transition principles. From a governance perspective, debt-for-nature agreements generally include requirements for transparency, independent auditing, and reporting, thereby aligning with the OECD Principles of Corporate Governance and the UN Global Compact standards.
From the perspective of sustainability reporting, the debt-for-nature swap mechanism also strengthens companies' compliance with international reporting standards. In this respect, biodiversity and climate indicators included in the Global Reporting Initiative (GRI) standards, carbon disclosures under the Carbon Disclosure Project (CDP), environmental and social impact reporting required by the European Union's Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS), as well as climate-related financial disclosures set out in IFRS S2, can all be supported by measurable and verifiable data derived from such swap projects. In this way, debt-for-nature swaps emerge not only as a means of alleviating debt burdens but also as a robust green financing and sustainability reporting instrument in line with international regulations.
5. What Agreements Are Concluded Between the Parties Under the Debt-for-Nature Swap Mechanism?
The debt-for-nature swap mechanism, which involves a large number of actors and accordingly imposes various rights and obligations on the parties, naturally requires the negotiation of multiple agreements.
First, in the context of debt restructuring and financing, debt restructuring agreements, loan agreements, and, in certain cases, bond issuance agreements constitute the fundamental building blocks of the legal and financial processes. These instruments set out in detail the conditions under which the debt will be settled, how repayment schedules will be arranged, and how investors' rights will be safeguarded. In particular, in transactions involving the issuance of green or blue bonds, investor disclosure documents and collateral structures must be carefully prepared.
Secondly, agreements concerning environmental commitments are of particular importance. Environmental commitment agreements ensure that the debtor state allocates resources to projects, while, where the private sector is involved in such projects, compliance with ESG criteria and reporting obligations are incorporated into contractual provisions. In addition, in projects implemented through debt-for-nature funds, public-private partnership (PPP) agreements come into effect, clearly defining the obligations of the companies involved.
Finally, additional arrangements are made for risk management and investment security. In this respect, insurance and guarantee agreements, collateral agreements, and investment protection treaties designed to safeguard international investors may come into effect. Given that swap transactions are exposed to political risks and market fluctuations, guarantee mechanisms provided by the insurance sector are regarded as an indispensable component of the process.
III. CONCLUSION
Although the mechanism was originally defined as a debt restructuring method developed between states, today it has evolved into a model that, under the growing influence of sustainability objectives, ESG criteria, and United Nations Sustainable Developments Goals criteria, also involves the private sector and serves as an example of various green financing methods. While it has not yet been directly regulated by specific legislation, its long-standing practice has played a critical role in the development of financing models and in the establishment of long-term and strategic partnerships between countries.
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