TURNEFFE ATOLL, Belize — Belize faced an economic meltdown. The pandemic had sent it into its worst ever recession, putting the government on the brink of bankruptcy.
A solution came from unexpected quarters. A local marine biologist offered Prime Minister Johnny Briceño a novel proposal: Her nonprofit would lend the country money to pay its creditors if his government agreed to spend part of the savings this deal would generate to preserve its marine resources.
For Belize, that meant its oceans, endangered mangroves and vulnerable corral reefs.
The resulting deal, known as blue bonds, is an example of a novel approach that has allowed a growing number of developing nations to cut their debt by investing in conservation, giving them a larger role in the fight against climate change.
“It gave us breathing space,” Mr. Briceño said. “Instead of bondholders, we will now be paying to protect our environment.”
At its simplest, the blue bonds are the equivalent of refinancing a mortgage.
Like other countries around the world, Belize has financed its public spending partly through the sale of international bonds, a type of debt that allows governments to raise capital, but often saddles them with high-interest payments for decades.
Under the blue bonds deal, the Nature Conservancy, a Virginia-based nonprofit, lent Belize more than $350 million to enable the Central American nation to buy back international bonds worth more than half a billion dollars.
The Nature Conservancy financed the loan through the Zurich-based bank Credit Suisse, which raised the money by selling new bonds to clients looking for environmentally friendly financial products.
The deal freed up more than $200 million, or nearly a tenth of Belize’s annual economic output, to be spent in other areas. In exchange, Belize agreed to designate 30 percent of its waters as protected, limiting the extent of activities such as fishing and construction. It also committed to spending $4.2 million a year on preserving these areas’ biodiversity.
Proponents of the deal hope the financial and climate incentives will help small or poor nations escape the interrelated challenges of excessive debt and environmental degradation, opening a path to sustainable growth.
Belize and the Nature Conservancy are trying to preserve an environment threatened by rising water temperatures, beach erosion, construction and overfishing.
Still, conservation efforts often clash with the growing economic needs of Belize’s vital tourism and fishing industries, highlighting the challenges of environmental finance.
“You can’t conserve everything and leave us with nowhere to work,” said Ian Palacio, a Belizean fisherman.
Mr. Palacio, 43, makes his living in pristine Turneffe Atoll, a sprawling marine reserve of mangrove-covered islets covered by the conservation deal. The atoll lies along the Western Hemisphere’s largest coral reef and is rich in lobster, dozens of fish species, dolphins, manatees and rare trees.
“Conservation is good, but we’ve got to see the benefits,” he added.
From their rudimentary wood camps set amid the mangroves, Mr. Palacio and his companions sail out daily during the fishing season in search of lobsters, Belize’s most valuable ocean commodity.
The fishermen use techniques little changed over the centuries: They dive to wooden overhangs built on the seabed and grab crustaceans or use long poles to haul lobster traps to their boats.
About a dozen rangers patrol the atoll’s waters, checking fishing licenses and the size of caught lobsters to protect the stocks. They said they need more fuel, personnel, radios and guns to better protect the reserve. Because of fuel shortages, the coast guardsmen stationed at the atoll rarely leave their outpost.
“If we have the resources, we can reach the right balance in the ecosystem,” said Valdemar Andrade, the reserve’s manager.
The Nature Conservancy closed its third blue bonds deal in September with Barbados, another small Caribbean nation saddled with debt and facing climate change threats. Countries with larger economies, including Ecuador and Sri Lanka, have made similar debt swap proposals,
Government officials and environmental groups hope the spread of such arrangements will make climate change a factor in how private investors, multilateral organizations like the International Monetary Fund and sovereign creditors like China lend and recover trillions of dollars from poorer nations.
“The global financial architecture is just not wired to give countries meaningful credit for positive nature investments,” said Slav Gatchev, the head of the Nature Conservancy’s sustainable debt division.
Long considered a global finance niche, so-called debt-for-climate swaps entered the mainstream during the pandemic as lockdowns cratered economies and forced developing nations to take on new debt at record pace, while reducing the revenues needed to pay it back.
The idea of giving developing countries some debt relief in return for climate action started in the 1980s as a way to help protect rainforests.
What is different about the model offered by the blue bonds is that instead of giving countries modest one-time debt reductions, it marshals the resources of global financial markets to unlock new conservation funding, said Mr. Gatchev of the Nature Conservancy.
The first country that adopted the blue bonds, the Seychelles, an island nation in the Indian Ocean, has met its goal of putting 30 percent of its waters under protection, providing sanctuaries to vulnerable species, according to the Nature Conservancy. Human activity is banned or severely restricted in about half of the protected areas.
Still, economists and conservationists say these financial deals meet just a sliver of urgent global needs.
The combined $683 million of debt exchanged by Belize and Barbados is 0.03 percent of what developing nations owed private creditors at the end of 2020, according to the World Bank.
And the $134 million that the two countries have jointly committed to marine conservation over the next 20 years is an even smaller fraction of the $125 trillion that the United Nations estimates must be spent globally to reach net-zero emissions by 2050 and avert the worst consequences of climate change.
Some economists say debt relief will not have lasting impact on small, tourist-dependent nations unless they diversify their economies and boost productivity.
The overall environmental impact from the blue bonds is also limited because governments are given years to show conservation progress and are not required to impose strict limits on human activity in their waters.
Still, debt relief initiatives could contribute to climate action by aligning the financial interests of international investors and small nations, giving them more resources for public spending and incentives to grow in a more sustainable way, supporters say.
“How do I prioritize beach erosion when I have to get more kids into school or I have to immunize people?” said Henry Mooney, a Caribbean economist at the Inter-American Development Bank. “This is money for conservation that wouldn’t have existed otherwise.”
Blue bonds negotiators say the deal holds countries accountable by allowing creditors to file claims in international courts if they fail to meet their financial or conservation obligations, making the arrangements less risky to big asset managers and pension funds.
As a result, the debt swaps are more appealing to Western investors seeking to make money tied to positive causes, such as conservation.
“Investing is not an altruistic business, investors don’t just give money away,” Ajata Mediratta, a partner Greylock Capital Management, a U.S.-based investor that participated in the blue bonds deal.
In Belize, the debt swap deal has allowed the government to slash its debt burden and pass the country’s largest ever budget this year, according to Christopher Coye, Belize’ finance minister. Social spending has returned to prepandemic levels and the economy is expected to grow nearly 6 percent this year.
To meet its deal terms, the country of 400,000 banned the sale of publicly owned islets in a large part of its corral reef. The government also created 800 square miles of newly protected marine areas and plans to put another 2,000 square miles under protection by 2026.
But even as preservation has intensified, many atolls in the newly protected area, have already been sold and converted into resorts or private villas. The blue bonds deal has also largely left current fishing areas intact despite the harm the industry can inflict on the nation’s marine life.
Beyond the financial and conservation goals, the biggest benefit of the debt swap could ultimately be a reimagining of the national identity, said Julie Robinson, a Belize native and the country manager for the Nature Conservancy.
The pandemic shuttered overnight the country’s tourism industry, forcing many of its citizens to return to fishing and farming to feed themselves. In doing so, it drove home the value and fragility of Belize’s natural wealth, she said.
“As a Belizean, I want to make sure that as a country we’re able to grow and thrive,” Ms. Robinson said. “I hope that with this bond deal we can step back and think critically about our future. What kind of development do we want?”