S2 Episode 1: Financing the Future: Transforming Debt into Conservation Success

Today we talk with Slav Gatchev from The Nature Conservancy to unravel the complexities and triumphs of sustainable debt and conservation finance. Gatchev, leading the sustainable debt team, brings a unique perspective shaped by his background in investment banking and emerging market development. He shares his transition from renewable energy and infrastructure financing to his pivotal role at The Nature Conservancy, highlighting the innovative ways in which financial instruments are employed to tackle conservation and biodiversity challenges. Delving into the evolution of debt-for-nature swaps, he explains their journey from small-scale initiatives to groundbreaking transactions like the Belize Blue Bonds, illustrating their significant impact in reducing national debt and bolstering conservation efforts.

We also examine the future potential of blue bonds and sovereign debt issuances in mitigating the triple crisis of debt sustainability, biodiversity loss, and climate change. Gatchev emphasizes the importance of these financial tools in the conservation community and their role in forging sustainable solutions for both governments and the environment. The conversation shifts to explore the innovative work of Gatchev's team, the broader implications of debt in environmental conservation, and the necessity of recognizing the economic and financial returns from investing in nature. This episode is a deep dive into the world of conservation finance, where debt transforms into a powerful agent for ecological preservation and economic resilience.

Transcript

David Meyers:
[0:30] Hi, I'm David Meyers. We're here with Slav Gachev from The Nature Conservancy, and really thrilled to be with you on another episode of 4Nature Podcast, and here also with Kim.

Kim Bonine:
[0:43] Hi, everybody. Welcome.

David Meyers:
[0:45] Great. So looking forward to this conversation, and let's just get started, Slav, with maybe some background on how you got into this space and what it is that you do.

Slav Gatchev:
[0:56] Thanks again for inviting me to this podcast and wonderful to meet Kim.
Indeed, I lead the sustainable debt team at The Nature Conservancy, which, as you know, David, is one of the world's preeminent conservation organization and one that I believe was a founding member of the Conservation Finance Alliance.
We're very proud and happy members of that entity. It's not a fluke, right?
Through our nature vest unit, through our new impact finance and markets division, TNC attempts to bring market solutions to intractable or hopefully formerly intractable conservation and biodiversity challenges.
And so that means a variety of different techniques related to, let's say, impact investing, the creation, seeding of private equity funds that invest in impactful projects that generate conservation climate benefits, plus some financial returns to investors.
And we also, of course, have a lot of policy work around bringing up sovereign debt, which I'm going to talk about later on, but also other policy interventions to basically make finance greener, if you will.

David Meyers:
[2:08] How did you yourself get interested or find the passion for conservation?
Because I know you come from more of a private-sector background.
So I'm curious, what excites you about this space?

Slav Gatchev:
[2:18] What's wonderful about TNC and impact finance and markets and nature vest is that we have folks that have joined us through kind of a conservation science pathway, if you will, PhDs in, in biology, plus perhaps background in law and business.
Whereas I come at this from a kind of more purely financial investment banking background.

[2:39] But the one always focused on development in particular emerging market development for over 20 years before joining TNC, I was an executive partner of an investment banking boutique in Washington DC called Delphos, which arranges infrastructure financing for emerging market projects.
And so I worked on a lot of renewable energy, for example, social housing and other transactions in Kenya, Afghanistan, the Americas, et cetera.
And so I have quite a bit of familiarity with that space, with foreign direct investment and development challenges in emerging markets.
And in the last few years of my tenure at Delphos, I ended up working on a lot of renewable energy projects, for example.
And so I saw the need to continue to invest in that space, the need to also figure out environmental and social assessments as part of major projects, and because a lot of, Delphos’s deals were done through multilaterals, the issues of development, impact assessment, and broadly speaking, the development score, if you will, of these projects was quite important.
And these are some transferable skills and things that I see in my practice now.
So yes, it continues to be a pleasure and honor to be working with the likes of the Inter-American Development Bank and USDFC, et cetera, in my new role.

Kim Bonine:
[4:03] That's great. I'm curious, Slav, Could you describe to us maybe an aha moment that you had in your work, you know, working in an investment bank, working with multilaterals, working on these development projects where you suddenly thought, I want to take this to the conservation sphere.
I want to move to a conservation organization.
What was an aha moment where you maybe saw these connections, a system of financing, of policy, of development, if you could share that?

Slav Gatchev:
[4:33] It wasn't so much a kind of an aha or eureka moment. While I was there for a variety of reasons I decided to, you know, it was an entrepreneurial journey at Delphos, which had its natural conclusion when we sold the firm.
And then I took a bit of a sabbatical to spend some time with two young children.
And it was also the first COVID summer. It was just a good time to hit pause and kind of think of what I wanted to do next. And so this opportunity to join TNC and lead their sovereign debt team presented itself.
And in a sense, that was an aha moment because I wasn't so much thinking before of a conservation organization as the next natural port of call for me until the opportunity itself presented itself and I looked into it and there was the aha moment of, wow, I didn't realize that TNC was doing these cool transactions at the intersection of nature, climate, and investing.
I also figured out that TNC was working with some of the same players that I had quite a bit of familiarity with, like the multilaterals, but also like major investors in this space along the lines of, let's say, Actis as a major emerging market player that is doing renewable energy projects and wants to preserve biodiversity.
And I figured out that my colleagues at NatureVest had done a transaction in Kenya with Actis to preserve vultures and other bird life around this major independent power project, this major wind farm in Kenya.
And I had worked on a follow -on transaction to that wind farm for Actis.
And so it was kind of like worlds colliding with that kind of very pleasing mixture of new aspects to my roles, of things that are very new and we involve learning and discovery and things that are familiar to me where hopefully I can hit the ground running in that value.

David Meyers:
[6:29] Such an interesting perspective that you're bringing to this.
Let's take a few minutes to talk about the lease and other transactions that are in the convertible debt or what TNC calls blue bond, because I want to acknowledge how transformative they are, even though they're building on a history of debt for nature swaps way back and this was a brilliant insight that this opportunity was here.
It's becoming profoundly relevant now as post -COVID countries are dealing with their debt burdens.
And I just want to acknowledge this as the great success that your team has had.
Can you share with us your thoughts on how transformative this is, where it could go?

Slav Gatchev:
[7:08] I know that the listeners to this podcast are a very sophisticated and knowledgeable bunch in this space.
And so I take it as a given that many of our listeners know about the Belize and Barbados Blue Bonds and simply a lot is out there in the public domain to fill in the details.
So like I'm going to follow your cue and summarize those two transactions briefly in a historical context and then we can kind of be more forward-looking and see what's next that you said.
I was really quite fortunate to work with my colleagues on and help them basically push over the finish line the Belize Blue Bonds, which happened in November of 2021, right in time for the Glasgow Cup.
And that remains the world's largest conservation financing for the ocean, one of the least funded, as you know, of the Sustainable Development Goals.
Basically, we refinanced 550 million of pre-existing distressed Belize debt with a new facility of 360 million, thus generating 180 million for conservation over a 20-year horizon and improving radically the credit profile of Belize.
Basically, while not necessarily getting them quite at the end of the path or right at that sustainability nirvana, we managed to reduce debt GDP by over 10 percentage points, and they got upgraded following the transaction, et cetera, et cetera, et cetera.
So it was a very powerful mechanism.

[8:35] And if you will, you can, in slightly tech terms, you could describe it as debt for nature 3.0 to build on the early transactions from the 80s, which back to the future, which the likes of TNC, WWF, and Conservation International did in the 20 years ago or 30 years ago.

[8:54] And those involved relatively small amounts of money, $5 million here, $10 million there, typically under the Tropical Forest Conservation Act.
But they established, as you said, David, they established some of the patterns and the structures that we now are using for 3.0s, including the use of a conservation fund, for example, as the implementation entity for these transactions to receive the savings generated by these deals and then figure out how to downstream them towards, in this case, the blue economy.
As an example of a 2.0 perhaps on that journey was the Seychelles deal, which TNC did about six years ago or so, which was a larger amount.
It was $20 million, and it involved the funding of a new loan, which was different from the 1.0s, which is kind of more of a political will with the stroke of a pen, a country reducing its claims against a borrowing nation, in this case, US versus Bolivia.
Now we have other examples in the meantime, including a more recent one, again, back to the future, where Portugal reduced its claims vis-à-vis Cape Verde.
This was announced just about a month ago or so against some conservation and climate commitments on the part of Cape Verde.
So the 1.0s continue to have their time in place.
That's where the software metaphor perhaps doesn't quite work out because those are the iPhones that we still use, even though we have some perhaps newer and shinier models.

[10:19] So anyway, the Seychelles deal involved the funding of a new loan to refinance some official debt.
So the official debt part is more reminiscent of the earlier transactions.
And that loan was funded by TNC. And then fast forward then to Belize, where we're talking about much larger amounts, so from 20 million new money to 360 million of new money, where TNCS had an investment in the structure, but the lion's share of the new money came through a capital markets issuance arranged by Credit Suisse with a AA rating, so a formal credit rating from Moody's, et cetera.

[10:55] And the absolutely crucial aspect of both Belize and Barbados that I'm going to mention in a second is the use of credit guarantees, credit support, political risk insurance to de-risk the transaction and bring that credit rating to the table.
And that helped us to do this financial alchemy, if you will, of transforming in the case of Belize, a defaulted sovereign into a high investment grade issuance.
And that was the clever use of political risk insurance from USDFC, who played an absolutely pivotal role in this transaction as de facto credit support.
And then in Barbados, it was a $150 million transaction, which was structured, again, the credit support was the central aspect of the deal.
And that was a slightly different approach where we partnered with the Inter-American Development Bank and did a co -co-guarantee.
So IDB provided a hundred million guarantee, TNC provided 50 million guarantee.

[11:55] And so on the back of those guarantees, we raised $150 million on very competitive terms, thus generating 50 million for Barbados marine conservation.
For both Belize and Barbados, these transactions allowed the governments to make credible commitments toward protecting 30% of their ocean by 2030, in line, of course, with the global commitments that now the world has undertaken in Montreal for global 30 by 30.
So very pleased with both transactions, they kind of showed how those early smaller deals can be used as a platform to build something a lot larger and generate significant amounts of money for conservation marine, but also they can be applied towards terrestrial conservation, towards climate first projects, et cetera, to address what you identified, David, is even though you didn't quite use these terms, but I will, if you will, triple crisis that we're facing, that many, especially emerging market sovereigns are facing, the triple crisis of debt, debt sustainability and lack of access to capital markets, biodiversity, and climate.

David Meyers:
[13:04] Again, amazing progress there. I know that you have other potential deals in the works, so I'm wishing you the best of luck for that.
You're calling these blue bonds to a certain extent, but there's other...
I mean, debt form is a major source of how governments finance their activities.
And there's been a green bond in Indonesia. There's been, Fiji's been working on a blue bond.
They've done a green bond. There's other initiatives out there.
Even the Seychelles was a blue bond in association with the debt conversion.
What's the future of these blue bonds, the more traditional sovereign debt issuances?
And how does the conservation community deal with the, as you said, the debt crisis and the fact that debt becoming more and more expensive?
And I'd love to get your take on that. And just to make it more complicated, some people say we are the biggest debt crisis is that we have a huge debt to nature that we're not addressing.
We're borrowing from nature in ways that are unsustainable. So throwing that out there, Slav.

Slav Gatchev:
[14:07] Our perspective is that, and we're saying the same thing, there is a massive underfunding rate, annual…
So it's a growing deficit if you will.
So there is massive annual underfunding of climate and conservation projects.
And people estimate it, you know, it's, you know, hundreds of billions of dollars per year.
And it's getting worse, right? Because we keep digging. We haven't stopped digging ourselves into a hole.
And so I would be the first to say that debt conversions, debt-for-nature swaps, whatever you call them, are part of the solution.
They're an important arrow in the quiver, but they're not the solution, or they're not a panacea alone.
And so we need a little bit of everything or a lot of everything.
We just throw the kitchen sink at the problem as financial community.
And so that includes grants, grant mechanisms, that includes bilateral loans from direct loans from the multilateral development agencies, that includes official development assistance from the rich world to the, if you will, the global South.
And it includes in some instances, good old-fashioned debt forgiveness in cases where countries are not just merely distressed or merely don't have access to capital markets or face very high-interest rates, but have kind of fallen off a cliff and are in distress and basically have defaulted on their obligations.

[15:31] And so we need more of everything and we see them, our sovereign debt interventions, which have been focused on refinancing more expensive debt as part of that solution set.
And there's many, many countries right now, many emerging market sovereigns that face high, in many cases, rising yields on their bonds.
That means that basically, investors are trading their bonds at the discount to par.
And so something like 30 sovereigns right now face yields to maturity exceeding 10%, which means that they practically are shut out from the international capital markets. And they're facing looming maturity.
So they would have, let's say, typical sovereign in a few months' time may have to make payments of as much as, let's say, $500 million this year, another billion maybe next year, et cetera.
Under normal circumstances, they might then go to the capital markets and roll forward those maturities, but now they can't, or at least they can't do so easily and affordably.
And that can actually push them over that cliff that I mentioned.
So a liquidity challenge can turn into a solvency challenge.
In an environment like that, if you're the treasury secretary, or if you're the minister of finance, you're looking at your priorities and debt service, essential spending on social programs, et cetera, of course, would come first.

[16:54] And spending on biodiversity and climate gets pushed towards the bottom.
And that is part of the debt that we owe nature, if you will, that unfortunately many cities will come back to haunt us.
And so our structures then allow us to tackle this triple problem that I described earlier just head-on by allowing countries to effectively reprofile their debt to access capital markets more affordably and generate savings that then they can apply towards biodiversity and climate commitments aligned with their priorities.

[17:28] So we're not telling governments what to do. We're rather giving them some financial flexibility to implement projects that they had in mind in the first place, projects that, for example, would be included in their nationally determined contributions under Paris or towards 30 by 30 commitments.
So that's kind of how we are approaching it from my perspective, from the perspective of the sustainable debt operations of TNC.
But as I said, that's one aspect among many others.

Kim Bonine:
[17:57] Great. Thanks, Slav. So interesting to hear about all these different approaches and mechanisms.
And I have a question that is sort of going back to what you mentioned about the massive underfunding of conservation that it seems everyone's aware of.
David and I were just at the Fifth International Marine Protected Areas Congress, and a huge emphasis was around conservation finance.
How do we generate more finance, more funding?
And so something that I think is really interesting is this issue around convincing governments, to support conservation or support protection when there's often a perception of these things being a cost center, and that these areas need to somehow fund themselves.
Whereas almost any economic study that's been done about investments in nature or investments in a healthy environment typically show a huge economic return, return, sometimes financial return.
And so governments invest all the time in things like health, education, infrastructure, with the presumption that those will then provide economic benefits, welfare benefits, well -well-being for the country, for society.
And the same is true for investments in the environment. It's no different.
Yet it's perceived incredibly differently by governments and by the conservation community and I'm curious whether you see either this happening or you see a need for the conservation community, for the environmental community to start trying to talk about investments in conservation, the same, as we talk about investments in health and education in terms of the economic returns, rather than it being put in this different place of needing to make the business case for conservation.
That seems a higher bar than what I've seen is people making the business case for a new road.
And so I'm really curious kind of what you see in that space and where you see we need to go as a conservation community.

Slav Gatchev:
[20:05] In part, it is because of lack of knowledge and understanding of these issues and the return on nature, the return on investment in biodiversity and climate.
By the way, we look at climate through a nature lens, you know, nature-based solutions to climate.
And we're doing a little bit to dispel some of these myths and to show from a kind of from an economic return perspective, like you said, that these investments have a positive economic, if you will, IRR, that an investment, for example, in a marine protected area will allow for fish stocks to recover so that, you know, you can have more plentiful harvests down the road, for example, not to mention tourism and other co-benefits.
So TNC published a report based on great work done by an Oxford scientist, economist, Anthony Waldron, who estimated the return on investment in the costs, yes, the opportunity costs, the cash costs of having marine protected areas, but then the return on investment in those.

[21:11] And so that certainly part of the solution is to be more knowledgeable, to study this, and to disseminate knowledge.
Another idea that you can throw in there is you mentioned infrastructure, and that's kind of near and dear to my heart because I come from an infrastructure finance background, and we need better understanding as to how natural solution to green solution to infrastructure challenges, for example, with respect to water purification, water delivery, can be useful tools, if not to replace, then to supplement investment in gray infrastructure, right?
Typical municipal, for example, water purification and delivery mechanisms, or in the case of coastal protection, can you use coral reefs and mangroves as opposed to building a seawall?

[22:00] And so if you then can show that an investment in a nature-based infrastructure solution can deliver these benefits, then that's a very important first step because then you can put a price on those benefits.
Governments can contract. There is a very well-established industry of project finance, private investment in infrastructure, where governments tender, for someone you mentioned, the toll road, governments tender for a private contractor to build a toll road.
In a similar fashion, governments can tender for a private consortium, for example, to rebuild a coral reef, say, and then pay fees over time for the ecological services delivered.
And so the first step is to assess the economic return on investment.
And then the second step is to figure out a financial mechanism because just because something is worth doing doesn't mean it will get done unless you can then find the financial mechanism and the contractual mechanism to call for it, to commission it.
And so that would then be the next step.
And that then leads me to the need of being more intentional around the pricing of ecological services.
Carbon credits is certainly one thing that's out there, and TNC has a major investment in understanding carbon projects, in helping develop credible, nature-based solutions to carbon, and to market the resulting believable high-quality carbon credits to credible buyers, including with respect to blue carbon. But more is needed there.
The current carbon credit regime, the current red plus regime are just insufficient, but there is now a lot of talk about eco credits.

[23:41] And so we would want to make sure that those are done credibly, appropriately.

[23:47] And if so, they can represent a major revenue stream to governments to invest in these projects and to potentially borrow against future revenue streams.

Kim Bonine:
[23:57] That's great. I'm wondering if you're also seeing, talking about these different vehicles and mechanisms and need to sort of recognize the economic returns, financial returns, but also recognize there needs to be a vehicle and a mechanism.

[24:13] And that's so critical. And even if the funds or financing is there, how do you get it to where it's needed?
And there's some really exciting 2.0 and 3.0, the blue bonds and things you're describing.
Do you see an analogous mechanism happening to get funds at more of a local scale?
And this is something that's come up a lot around community livelihoods, some of the huge local opportunity costs that happen when conservation programs come in, and the difficulty of connecting impact investment or sort of financial streams to sort of a local level who often need grant funding before they're ever ready for kind of that impact investment.
I'm curious whether you see a similar sort of movement or sort of new mechanisms happening.

Slav Gatchev:
[25:00] We're even trying to do this with, you know, in the context of our blue bonds, nature bonds, if you will.
And it is through the creation of the conservation funds as the delivery mechanism for the financing.
And we have, by way of a commitment from our partner governments is that they would channel the savings from the transaction, 15 million in the case of Barbados, 180 million in the case of Belize, over time into these domestic conservation funds that are structured as independent, public-private partnership entities, but outside of the regular government channels, ministries of environment, et cetera.

[25:40] And this way, A, we can make sure that indeed, those flows happen, as promised.
B, we involve communities in a more intentional way, including through stakeholder representation on the board of directors of these conservation funds, and very specific calls for proposals with very transparent rules of the game as to how the funding will be downstreamed in the form of grants, indeed, to local businesses, local cooperatives, NGOs, government agencies that can apply.
And so long as they meet the investment requirements and the standards set by the, again, in a very transparent and public way of the conservation fund that they can benefit from that funding.
And so we very much are encouraging local communities to take advantage, to avail themselves of that funding.
And we have some very good examples in the Seychelles, where the conservation fund there, SeyCCAT, it’s going through several rounds of funding, and there's some examples on their website of the types of businesses that they have supported, business and other community efforts.
So this is a start. We think that the conservation funds can grow and develop other sources of funding outside of the original transaction that seeded them so that they can use that as a platform to build upon.
We have some very good examples from the 1.0 universe where, for example, Siempre Costa Rica, which was established as a result of an early debt-for-nature swap there, grew and effectively transcended the original transaction, and now it's a major player in Costa Rica.
And so we're hopeful that those upstream efforts that we're doing right now will blossom and result in some very active projects.
So that's one aspect that is very close to me and something that we can do something about.
There are many other ideas, modern ideas, other initiatives out there that I can think of.
For example, the Global Fund for Coral Reefs, they do very important work in dispersing some grants to develop investable projects that then can be picked up by, let's say, Pegasus and other financial players that are looking for a larger scale, more de-risked investment-ready project.
So some good work out there. And I know that our friends from the Global Climate Fund and many others are thinking and doing interesting work in this respect.

David Meyers:
[28:06] Knowing your background in infrastructure finance and the work that you've been doing with TNC, if you could change one thing about the way debt is used and debt flows to and from countries that could transform how humans relate to nature, like bringing nature into that picture, what would you do?

Slav Gatchev:
[28:27] I will ask for two things, right? One is very tangible, very doable in the here and now, and something that's a bit longer term and more ambitious.
So my simple and straightforward gift that can be done in the here and now is greater participation by the multilateral development banks in this sphere.
They are an incredibly important resource. They do already a lot in the space of climate and biodiversity.

[28:57] They have incredibly smart, talented people, both in terms of financial expertise, but also industry expertise, technical expertise.
And they're sitting on a lot of resources and have access to potentially more resources through very helpful and committed shareholders.
Like, for example, Secretary Yellen, the US Treasury, President Macron of France, who is taking on the mantle of DFI reform, our friends from the UK, our friends from the European Union, Japan, and other like-minded shareholders, who would, I believe, be even more generous with their allocations to the DFIs, but they would want the DFIs to also lean in in this theme.
And so while there are different ways that the World Bank and others can step up their game, one very practical way to facilitate these sovereign transactions that we've been discussing is the deployment of their partial guarantee product in a much more intentional and aggressive way to mobilize a multiple, a larger multiple of commercial funding that can come from international capital markets.
There is a much greater leverage effect for the clever strategic use of guarantees as opposed to direct lending.

[30:13] Yes, I as the World Bank can lend Ghana a dollar directly, but if I guarantee a dollar, then I would be able to raise two, three, or more dollars of external financing.
And so I think that that's something that IDB, right, in Pervados demonstrate how it can be done by partnering with us and using their partial guarantee product and thus generating these important outcomes that we mentioned, this triple benefit to address the triple crisis, and others can do more.
There is nothing stopping them, except perhaps some kind of political will, if you will, at the top of these agencies to do more of that.

[30:52] In terms of kind of the longer objective, we have a policy initiative at TNC called Greening Sovereign Debt, where we're trying to advocate for some more systemic change in the way sovereign debt is issued, refinanced, et cetera, to incorporate climate and biodiversity considerations.
So watch this space. We will issue some specific recommendations in the coming months.
But in the meantime, we have done very good work to talk to stakeholders, to talk to the IMF, for example, to help them understand how these transactions can be helpful and to figure out how, for example, when the IMF is looking at debt sustainability, right, the debt sustainability of a country to incorporate nature risk and climate risks in those assessments, and to figure out how to effectively give credit to governments that commit to appropriate climate and biodiversity action as part of, for example, debt sustainability analysis, decisions to land or guarantee out of the new resilience and sustainability trust, decisions how to approach countries that are sticking restructuring of their debt, some of the common framework, et cetera.
Those are kind of more longer term and higher ambition actions and where, you know, hopefully we'll have some more to report on in the coming weeks and months.

David Meyers:
[32:11] Excellent. Well, Slav. Thank you so much for sharing your thoughts with us, being part of the 4Nature podcast, and we look forward to continuing collaborating together.

Slav Gatchev: 
[32:20] Thanks for the opportunity. Take care.