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Rare good news from Credit Suisse with debt-for-nature swap deal

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Credit Suisse has struck a few fiendishly complicated deals over the past century and a half, such as the Mozambique “tuna bonds” that pushed the southern African country into a debt crisis.

Its latest deal, the world’s biggest ever debt-for-nature swap, is much better for its image. The $1.6bn debt swap restructures some of Ecuador’s increasingly cheap sovereign debt while directing an estimated $450mn towards marine conservation in the Galápagos.

For today’s edition I spoke to the president of the development bank that provided a crucial guarantee for the swap about his vision for more deals of this kind across Latin America.

Plus the chief executive of Calpers, the biggest pension plan in the US, tells Jo Cumbo about its responsibility to help stamp out “greenwashing”. (Kenza Bryan)

The two banks behind Ecuador’s mammoth nature debt swap

Credit Suisse has been in the headlines recently for all the wrong reasons. But now there is a more encouraging reason to watch the Swiss bank. Even as it is swallowed up by arch-rival UBS, it is becoming an unlikely leader in innovative deals that repackage emerging market debt in exchange for promises to protect biodiversity.

After structuring and arranging the then-largest ever debt-for-nature swap for Belize in 2021, Credit Suisse said last week it had struck an even bigger (and more complicated) deal in Ecuador.

So how does this type of deal work? Credit Suisse bought $1.6bn of Ecuadorean government debt from the densely forested South American country — which is also in the middle of a brewing political crisis. Then, buoyed by guarantees and insurance from the US International Development Finance Corporation and the Inter-American Development Bank (IDB), Credit Suisse swapped the bonds via a special purpose vehicle for a smaller loan at a lower borrowing cost of just under 7 per cent for Ecuador.

What’s the link to nature? As part of the deal, Ecuador promised to spend hundreds of millions of dollars on marine conservation in the Galápagos. The twist also means Credit Suisse can, in theory, finance the bond purchase by issuing its own “blue” ocean-themed bonds, which ESG investors are keen to add to sustainable funds.

“This is not an individual ad hoc deal,” Ilan Goldfajn, recently elected president of the Washington-based IDB, told Moral Money last week after the bank helped get the deal off the ground. The IDB is in active discussions with other Central and South American countries with a view to doing more debt-for-nature swaps in coming months, he said, after receiving significant interest at the IMF spring meetings and its annual gathering in Panama.

The current global macroeconomic conditions support more deals of this kind, he said. “We are in a period where we had the pandemic, the Russia invasion, a moment where debt and fiscal issues are at the forefront . . . at the same time we’re at a moment where there is a push for reforms of international [development bank] organisations to try to be as efficient as possible.”

Before Ecuador, the development bank’s name has cropped up in some of the biggest deals of this kind. It provided a guarantee for a debt-for-nature swap in Barbados last year, and also advised on Uruguay’s $1.5bn bond issuance last year, which linked the cost of repayments to the country’s ability to reach deforestation and decarbonisation targets. Goldfajn said the bank had been investing a lot of resources in “financial innovation”.

A former governor of Brazil’s central bank, Goldfajn has more recently worked as an economist and director at the IMF, where he oversaw the launch of the fund’s first resilience and sustainability facility last year. The IMF has approved credit programmes tied to climate-change reform for Bangladesh, Barbados, Costa Rica, Jamaica and Rwanda, and disbursed its first payment to Costa Rica in March this year, according to a paper by the Centre for Global Development.

Goldfajn argues for more integration between development banks and the IMF, suggesting a joint fund could be created for guarantees for green finance instruments.

Although the IDB focuses on development in Latin America and the Caribbean, the appeal of debt-for-nature swaps could fast become global. Bank of America is reportedly preparing a similar deal for the summer, a $500mn debt swap for marine conservation in Gabon. We also hear development banks will be looking to discuss this type of agreement at Macron’s climate summit in Paris next month. (Kenza Bryan)

Calpers chief: Show us the climate data

Companies prone to exaggerated sustainability claims are facing a gathering crackdown by regulators on both sides of the Atlantic. They also have to contend with Calpers, the US’s biggest public pension plan, whose boss says it is determined to push companies for better information around climate-related risks.

Major institutional investors like Calpers, which manages a $442bn retirement fund on behalf of 2mn education sector workers in California, have come under pressure from environmental campaigners to take climate issues more seriously.

One of these pinch points has been “greenwashing”, or exaggerated claims by companies about their environmental performance.

Asked whether large asset owners such as Calpers could play a role in tackling greenwashing, chief executive Marcie Frost said the fund “had an obligation” to make sure that the markets were pricing climate risk “appropriately”. 

“We have been a very strong voice around transparency and around getting the data we need to price that risk appropriately,” she told me in an interview.

But Frost defended Calpers’ decision to retain stakes in fossil fuel businesses, such as oil companies which deliver steady dividends. In California, there has been a renewed legislative push to force the fund to divest its fossil fuel holdings by 2030, a move which Frost said would force the fund to shed about $9.4bn of assets.

“Walking away from the sector — we don’t think that is the right answer today for an energy transition,” Frost said. “I’ve got a group here in California who don’t want any greenhouse gas emissions in the portfolio. If you really take this out, there’s no way we could get to a 6.8 [per cent] return assumption,” she added, referring to Calpers’ annual target for investment returns.

“We believe we have to be in with the companies . . . it’s going to take time and capital in order for these energy companies to do the transition to cleaner energy. Greenwashing can be real but if you are engaging appropriately with these companies to be more transparent, we see these companies actually provide the data we need to make decisions on their actions,” Frost said. (Josephine Cumbo)

Smart read

PwC is under fire in Australia after using its knowledge of government tax plans to advise clients. This FT report outlines the “slightly terrifying” implications for the Big Four accounting firm.

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