Articles & Updates

Potomac Group and UNCCD: Debt for Land Restoration Swaps

Land degradation is one of the most challenging environmental problems that the world is currently facing. Like climate change and biodiversity loss, the international community’s ability to address global land degradation and desertification is often hindered by the conundrum of having to channel a massive amount of funds into countries whose economies are already heavily indebted and overleveraged. The main objective of this report is to explore viable methods of financing land restoration using nature-based debt instruments, including debt swaps that provide debt service relief by channelling investments into land restoration.

Despite being key to climate change mitigation and biodiversity, land restoration suffers from an annual funding gap of USD 300 billion—leaving plenty of room for increased financial contributions from both public and private sectors. Should the financing become available, the case for investing in global land restoration is strong, with cross-cutting impacts that span a variety of sectors and provide widespread benefits, including the support of several Sustainable Development Goals.

Efforts to combat the COVID-19 pandemic have exacerbated this situation, leading to heightened expenditure needs and mounting debt stock in a time of drastically reduced tax revenue and stunted economic growth. As a result, the imminent threats to the natural environment are now even more inseparable from the growing debt crisis, prompting the need for holistic and multidisciplinary solutions.

The international community has therefore been increasingly focused on finding comprehensive methods of addressing this issue, and multiple innovations have since emerged for addressing these crises in tandem through the international financial architecture. One such innovation is the scaling up of contingent debt swaps, also known as debt conversions. The environmental allocations from a swap can have a profound ecological impact, but until recently, they have been relatively small in terms of their fiscal impact. If engineered in a certain way, however, a swap transaction can potentially ease an unsustainable debt burden, paving the way for even more spending on green projects by relaxing budget constraints.

In order to support the mobilization of resources for combating land degradation and desertification, this report primarily focuses on the debt-for-land-restoration swap mechanism. In addition, the report also explores how other innovations in green finance could potentially be applied to land restoration. These innovations include both the established use-of-proceeds bond structure and the novel sustainability-linked bond concept. A solution featuring one or more of these structures should be tailored to each country’s individual situation with respect to both debt and land degradation. Effectively planned and implemented, these mechanisms can be applied to a broad range of scenarios to achieve a meaningful impact worldwide.

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