Drowning in Debt: Debt for Nature Swaps and Water Security

From June to August this year, global temperatures reached dangerously high levels, making this summer the hottest in recorded history. This trend is projected to continue throughout the year, with the EU’s Climate Service warning that 2024 will surpass the unprecedent temperatures of the previous year.1 As the climate crisis escalates and the public risks becoming increasingly desensitised due to the frequency of such headlines, it is imperative to focus efforts on overcoming barriers that hinder further investment in climate mitigation and adaptation strategies.

This is especially true as it relates to issues of water insecurity, which is defined as “inadequate or inequitable access to clean, safe, and affordable water for drinking, cooking, sanitation, and hygiene."2

The United Nations estimates that more than 2 billion people around the world live in countries where the water supply is inadequate and by 2025 half of the global population could be living in areas facing water scarcity.3

Water as a resource blurs boundaries and sectors, percolating into the realms of food, energy, sanitation/health, and conflict. Consequently, disruptions in the quantity, quality, and delivery of water cannot be evaluated in isolation, particularly in the context of an ever-changing environment progressively defined by climate change.

Water scarcity, where water demand exceeds availability, is becoming a growing challenge.4 Projections show that a combination of rapid population growth, coupled with swelling urbanisation schemes, will further complexify the interwoven relationship between water, energy, and food, making it more difficult to allocate these resources. A recent study found that the global urban population facing water scarcity could increase from 933 million in 2016 to 1.7–2.3 billion people in 2050.5 Investing in water security schemes is therefore vital.

The scale of government action on water security has yet to reflect the size of the challenge. According to a recent review, 80% of countries report insufficient financing to meet national water supply and sanitation targets.6 Despite these shortfalls in funding, there has been growing interest in creating public-private partnerships to invest in water security.7 As political will to pursue water security-related projects exists across the world, the issue is a matter of tapping into global reservoirs of resources, channelling this potential for commitment into projects that will aid in the pursuit of sustainable development.

However, these reservoirs do not pool evenly as the Global South is disproportionately affected by the physical impacts of climate change. This is despite bearing little responsibility in the overall production of global emissions.8

These disparities are reflected in financial flows for adaptation and mitigation schemes. The IPCC’s AR6 report (2023) observes that “although global tracked climate finance has shown an upward trend since AR5, current global financial flows for adaptation, including from public and private finance sources, are insufficient and constrain implementation of adaptation options, especially in developing countries."9 There are many reasons for this, one being the unsustainable levels of debt some of these nations have incurred.10

There is an asymmetrical distribution of debt across the world – and those who are the most in need of climate finance are those afflicted with the most debt. According to the United Nations Global Crisis Response Group in 2023, global public debt has increased more than fourfold since the year 2000 and almost 30% of this debt is owed by developing countries.11

Debt consequently drags down development as the UN report finds that 3.3 billion people live in countries that spend more on interest payments than on education or health.12 A combination of the COVID-19 pandemic, the cost-of-living crisis, and climate change, coupled with an unequal international financial architecture, makes developing countries’ access to financing inadequate and expensive.13 Currently, developing countries pay higher interest rates compared to their developed counterparts, demonstrated by “countries in Africa [which] borrow on average at rates that are four times higher than those of the United States and eight times higher than those of Germany."14

Debt accumulation, which continues to rise instead of contract, therefore reinforces global hierarchies, making it all the more difficult to create long-lasting answers to the climate catastrophe. Pulling on this thread reveals an interesting issue: the nexus between climate solutions and debt restructuring.

The cascading risks of climate change present similar challenges for both debtor and creditor countries, especially in an increasingly refractory international landscape. The links between water-related hazards and water security are becoming increasingly apparent with an uptick in extreme weather events such as droughts, floods, heatwaves, and crop failure. This is also translating into transboundary impacts including migration, market destabilisation, and armed conflict.15

One way to address the relationship between debt accumulation and water insecurity, and to better manage water-related risks, is through initiatives like debt restructuring. By buying back debt from creditor countries, governments can invest more money towards environmental programmes,16 while simultaneously improving the country’s international purchasing power.17 The implementation of debt-relief programmes also boosts the productivity and output of debtor countries.18 The gains are not as immediately apparent for creditor countries, however, they are equally important. Though creditor countries would essentially be losing money that they had loaned, they reap the financial rewards in the long-run because the money effectively reduces high-risk claims that they would have to pay-off. As such, creditor countries can allocate their money in more fruitful financial ventures.19

The international community has made important strides in promoting multilateral investments to address unsustainable debt, as illustrated by the Bridgetown Initiative (2022). This programme was originally proposed to reform international financial institutions so as to help poorer countries cope with climate change.20 The proposal outlines three steps for development financing, with the first revolving around the terms and conditions of how funding is loaned and repaid by debtor countries.21 The second part of the proposal calls for development banks to dedicate an additional $1 trillion in funds to strengthen climate resilience in developing countries.22 The final element of the initiative aspires to establish a new mechanism, backed by the private-sector, which would fund climate mitigation and reconstruction after natural disasters.23

Another way to begin dismantling cyclical debt accumulation structures and help address climate change and nature degradation, at the investment level, is through the reimplementation of debt-for-nature (DFN) swaps with a specific focus on water security-related projects and initiatives.

DFN swaps are financial schemes which can be used to incentivize investment in conservation projects, while simultaneously alleviating outstanding debt owed by developing countries.24 This is made possible through “[the] purchase (at discounted value) of a developing country’s debt in exchange for environmental-related action on the part of the debtor nature.25

These swaps are not new. In the 1990s, the United States set a historical precedent for DFNs which generated nearly $177 million U.S. dollars for environmental and social projects within debtor countries in Latin America.26 DFN swaps have regained prominence in the aftermath of COVID-19 as a means to simultaneously ameliorate multiple sustainable development problems, including reducing debt burdens and directing funds to conservation projects while creating employment. This has been reflected in the market for sustainable bonds with $1 trillion USD being issued worldwide.27

However, this represents only a fraction of the global debt, which is estimated to total $226 trillion.28 Today, less than one percent, a mere fragment of total global debt, is being funnelled into sustainable markets.

DFN swaps can support a range of activities aimed at addressing water insecurity. Several successful programmes have been piloted in Costa Rica, where a DFN swap with the United States was used to finance wetland preservation in the Maquenque and Barra del Colorado areas.29 The various schemes under DFNs demonstrate the initiative’s potential and adaptability as they can be tailored to specific needs of different communities.

In an age of increasing political polarization fostering channels of conversation is vital. The total amount of debt swapped thus far pales in comparison to global levels of debt, but DFN swaps provide state actors an opportunity to engage in productive climate diplomacy. In today’s increasingly complex geopolitical environment, this shouldn’t be underappreciated. Though it may seem to be costly in the short-term, investing in climate adaptation is the most financially responsible solution given the mounting risks related to water insecurity in the long-term.