Alternative financial solutions via debt-for-nature exchanges show potential

Sovereign Focus law practice

, and ASMedia

2025 September 2 . 1:24 PM

2 min read

Financial exchanges, also known as debt-for-nature swaps, represent an intriguing alternative to... — Financial exchanges, also known as debt-for-nature swaps, represent an intriguing alternative to conventional funding methods

Alternative financial solutions via debt-for-nature exchanges show potential

In a historic move, El Salvador has completed a landmark Debt-for-Nature Swap (DFN) transaction, marking a significant step forward in innovative financial solutions for environmental conservation. This transaction, worth US$1 billion, is the world's largest DFN for river conservation and sets a precedent for future deals of this type.

The unique structure of El Salvador's DFN combined various financial products, including capital markets (Impact Notes), banking (loan and letters of credit), derivatives (floating to fixed rate hedge), project finance (conservation), and international arbitration (enforcement). This comprehensive approach demonstrates a sophisticated and well-thought-through strategy for conservation commitments and fund governance.

At the heart of the deal, El Salvador agreed to make periodic payments to a conservation fund co-managed by FIAES and CRS, and an endowment account designed to accumulate an endowment fund for the conservation program. The Rio Lempa Program will receive a US$ 350 million allocation over the next 20 years, the largest funding commitment a country has ever made for conservation in a DFN transaction.

To incentivise long-term compliance with its conservation commitments, El Salvador agreed to various sophisticated mechanisms. These include monetary payments in case of default or subsequent abandonment of such commitments.

Remarkably, the transaction was completed in just under one year, showing that complex transactions can be done on a more accelerated timetable where the circumstances allow.

El Salvador's DFN transaction is noteworthy as it focuses on river conservation, a departure from previous DFN conversions which had primarily focused on ocean conservation and related goals. Moreover, El Salvador established a zonal organization to oversee conservation and restoration of the Rio Lempa watershed, set up a water resources data monitoring system for the Rio Lempa watershed, and declared 75,000 hectares of protected aquifer recharge zones throughout the watershed by 2044.

While recent examples of debt-for-nature swaps apart from El Salvador’s US$1 billion transaction are not explicitly detailed in the provided search results, this transaction undoubtedly stands out as a significant milestone in global conservation efforts.

[1] Source 1 [2] Source 2 [3] Source 3 [4] Source 4 [5] Source 5