ESG Investing

Belize Deal Heralds Debt Restructuring through ESG

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A new blueprint has emerged for investors to use debt restructuring as a means to channel funds into environmental conservation projects in developing countries, potentially setting the stage for a new kind of green bond.

In October, Belize leveraged its coral reefs—the second largest in the world—as a novel way to restructure its national debt. The Central American nation announced plans to buy back its sole international bond from investors at a significant discount using cash lent by US-based environmental group Nature Conservancy. As part of the deal, Belize has agreed to pre-fund a $23.4 million endowment in support of marine conservation projects on its coastline.

News of the landmark deal broke as the Nature Conservancy unveiled a new report, Financing Nature: Closing the Global Biodiversity Financing Gap, which makes the economic case for valuing nature. Published in association with Paulson Institute and Cornell Atkinson Center for Sustainability, the report claims that additional investment of between $598 billion and $824 billion will be needed to sustainably manage biodiversity and maintain the integrity of the Earth’s ecosystem.

Tracking Breakthroughs in Bond-Building

Belize’s example illustrates a notable breakthrough from Nature Conservancy. Investors’ previous attempts at getting sovereign governments to incorporate ESG-friendly measures in debt restructuring agreements have not produced many concrete results. For instance, last year certain investors attempted to tie climate goals to Ecuador’s debt restructuring—without success.

About 84% of Belize’s bondholders accepted the deal to restructure roughly $553 million of its debt, surpassing the 75% threshold needed to secure the deal. This means that existing bond investors will get just 55 cents on the dollar for the Belize debt they hold. In what may signal the beginnings of a new pro-ESG chapter in emerging market debt restructuring, leading investors such as Vontobel Asset Management claimed in a Financial Times article that the agreement was aligned with their own firm’s wider ESG focus.

Nature Conservancy and other NGOs, meanwhile, have been gaining the Belize government’s confidence via environmental initiatives. In April, Nature Conservancy and 11 other organizations unveiled a partnership to protect 236,000 acres of tropical Belize rainforest.

Debt relief for developing countries has earned fresh attention amid many such nations’ struggles to recover from 2020’s global recession.

Calling for Debt Relief

Debt relief for developing countries has earned fresh attention amid many such nations’ struggles to recover from 2020’s global recession. Signs point to the potential for this issue to take on more precedence as major central banks including the US Federal Reserve begin to rein in their massive quantitative easing programs and consider interest rate hikes in the face of rising inflation.

Borrowing costs for many emerging market countries may rise considerably from here. In a report earlier this year, the Global Development Policy Center called for G20 nations to adopt a new framework that would require all creditors to provide significant debt relief to low- and middle-income countries in exchange for a commitment to use “newfound fiscal space for a green and inclusive recovery.”

If adopted, the proposal would likely make debt restructuring deals like the one in Belize a much more common occurrence. Partnerships between developed nations and their emerging counterparts on green debt restructuring create opportunities for ESG-aware private investors to get involved in helping emerging market countries survive COVID-19, furthering environmental causes like conservation, and perhaps even bringing Paris climate goals closer to realization.

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