Debt-Nature Swaps 

Project Stream 3 · Julia Nassl

Debt swaps are an established element of insolvency law: Distressed or even insolvent corporations offer creditors a share in the troubled company, for the creditors, in turn, to partially or fully cancel outstanding debt. Since the 1980s, this concept has been applied to sovereign debt, in the form of debt-nature swaps (DNS). In recent years, DNS are proliferating again, exemplified by initiatives in Ecuador (Galápagos Islands conservation), Belize, and Barbados (coral reef protection). These financial transactions involve the exchange of (predominantly developing countries’) sovereign debt held by foreign governments or commercial banks for local investments in environmental conservation.

DNS are typically offered to states that not only face constrained fiscal spaces due to their indebtedness and debt service obligations but are also particularly vulnerable to climate change and environmental degradation. DNS aim to address this dual challenge by leveraging a portion of public debt to implement climate-related or biodiversity-focused measures. DNS purport to create a triple-win scenario: debt relief for debtor countries, nature conservation for the (global) public, and reputational or financial returns—albeit discounted—for creditors. Despite its appealing goals, DNS warrant a thorough critical assessment: A lack of efficiency in reducing debt burdens, of sufficient transparency and of democratic participation structures—particularly for Indigenous communities—, risks of greenwashing or the privatization of climate and biodiversity finance (and governance) are but a few of the enounced criticisms.

Nonetheless, DNS are a compelling example of reflexive debt, i.e., the idea that financial obligations can be restructured to align with political and ecological rationalities. Moreover, DNS have the potential to put into question the predominantly financial perception of "debt": although not having lived up to their utopian aspirations, they invite us to rethink the very nature of debt–suggesting a utopia in which the financial debts of the Global South could be conceptually and materially linked to ecological or climate "debts" owed by the Global North.

Various existing structures as well as dissatisfaction with current state-of-the-art DNS provide a promising testing ground for our emerging theory of reflexive debt. Our analysis of DNS proceeds in three steps: firstly, we will describe and systematize implemented DNS and, by contrasting its outcomes with our reflexive debt theory, identify the so far under-analyzed structural legal constraints that are hindering DNS from turning a potentiality into a reality of reflexive debt. Secondly, we delineate institutional, procedural and substantive requirements for a DNS framework capable of realizing its transformative potential, including considerations of legal design, accountability, participation, and environmental effectiveness. Thirdly, insights gained from the DNS case study will inform a broader refinement of reflexive debt theory, offering a model for how law can act as an agent of sustainability and socio-ecological transformation.