Tackling the climate crisis

Seeking to prevent biodiversity loss through investment

The world’s biggest debt-for-nature swap shows that private capital can offer potential solutions to biodiversity loss when investors embrace complexity

22 Nov 2023

In May 2023, LGIM became the leading cornerstone investor on a refinancing deal that will shrink interest payments on Ecuador’s public debt by $1.13 billion, while raising $323 million for marine conservation around the Galápagos Islands.

The waters around the Galápagos Islands are home to nearly 3,000 species, 20% of which cannot be found anywhere else on earth, according to the Galápagos Conservancy. Indeed, it was the unique species of these islands that inspired Charles Darwin’s theory of evolution.

But both climate change and overfishing are putting pressure on this critical aquatic ecosystem.

Under the terms of the debt-for-nature swap, Ecuador have agreed to enhance the management of Galápagos marine reserves and promote sustainable fishing over the next 18 years to support biodiversity and prevent habitat loss.

Ecuador will report annually on progress towards its measurable commitments, which were developed in partnership with the Pew Bertarelli Ocean Legacy.

Legal & General was approached as an investor in the landmark deal based on its involvement in a smaller debt-for-nature swap in Belize.

Going the extra mile for biodiversity

The deal’s structure is incredibly complex, involving many different parties, additional insurance to lower the risk to investors, covenants related to location-specific nature restoration and huge scale.

However, as organisations get to grips with the connection between biodiversity and climate commitments, investors such as Legal & General are not put off by the additional work.

Legal & General is interested in how finances can have a positive impact whilst also seeking financial returns. We are willing to look at additional complexity if it’s got the right potential outcomes.

Wendy Walford

Head of Climate Risk

Legal & General

The Ecuador deal is an example of Legal & General’s inclusive capitalism model in action. The investment not only protects ecosystems and prevents habitat destruction, but it seeks to generates returns that will be used by Legal & General Retirement. It seeks to create a better future for pension holders through achieving investment returns and a more biodiverse planet.

The deal demonstrates increasing interest in biodiversity from the private sector as it acknowledges that our economies depend on nature.

Getting to grips with biodiversity

“Our financial systems are embedded within the natural environment, but the models that we use ignore it,” explains Walford. “We’re extracting from the natural environment faster than it can replenish itself. That’s when the financial models need to be reappraised to understand how we make sure that we operate in a sustainable long-term way.”

That means understanding how investments are dependent on and impact the natural world.

The business community has made strides in its understanding, but it is grappling with data limitations. “Being able to understand the impacts and dependencies of a financial portfolio on the natural environment means really detailed disclosures,” says Walford “That’s where the Taskforce on Nature-related Financial Disclosures (TNFD) comes in.”

The TNFD published its framework for nature-related risk management and disclosure in September 2023 after two years of development. The recommendations help organisations to report and act on nature-related risks. “They’ve been doing some great work on setting out what is decision-useful disclosures for an investor to understand those exposures.”

This development will hopefully pave the way for more deals from the investment community that take biodiversity into account.

We’re proud to have played our part in such a significant and unique transaction.

We’re proud to have played our part in such a significant and unique transaction. It truly highlights the role private capital can play – not only accessing potentially attractive returns, but also seeking to drive positive environmental change. As our alternative debt capabilities continues to grow, alongside increasing investor interest, we’re excited for what’s to come.

Jake Harper

Investment Manager

Legal & General Investment Management (LGIM)

Key risks

The value of an investment and any income taken from it is not guaranteed and can go down as well as up, you may not get back the amount you originally invested. Assumptions, opinions and estimates are provided for illustrative purposes only. There is no guarantee that any forecasts made will come to pass.