The danger of debt-for-nature deals

Volodymyr Zelenskyy was in the spotlight in London this week. But not to be overlooked are comments from Emily Shepperd, executive director of authorisations at the Financial Conduct Authority, who had strong message for environmental, social and governance investing: “More action, less talk on ESG.”

“You should be in no doubt that we are fully behind the government’s agenda to make the UK the first net zero aligned financial centre,” Shepperd said. “We want to clamp down on greenwashing and consider how to incentivise best practice.”

In today’s newsletter, we go elsewhere on the continent with Kenza’s piece about Banque de France’s new report on “debt-for-nature swaps”. And Simon reports on ClientEarth’s legal claim against the board directors of Shell, alleging that they have broken their duty to manage climate change and energy transition risks. Thanks for reading. — Patrick Temple-West

Banque de France cautions against debt-for-nature deals

So-called “debt-for-nature swaps” sound like a win-win for lenders, creditors and the planet. These deals restructure debt, forgiving part of it in exchange for biodiversity commitments.

They look particularly timely against the backdrop of rising fear of defaults by emerging market economies and the dearth of cash available for climate adaptation where it is needed most. Expect more on this theme at the spring meetings of the World Bank and IMF, which are expected to unlock faster adoption of blended finance (using public funds to de-risk private capital).

In the three decades to 2015, around $1.25bn has been spent on biodiversity through the use of nature swaps. Most of the swaps have been linked to debt cancellation by the US government in exchange for forest protection in the Caribbean and Latin America.

Belize, for example, agreed in 2021 to spend about $4mn a year on marine conservation until 2041 in exchange for a reduction in its external debt by about a tenth. Last April, the UN Development Programme specifically asked Sri Lanka to negotiate a nature swap programme to help mitigate its economic meltdown.

But economists at the Banque de France have warned against the “technical, financial and governance challenges” linked to the revival of these instruments, in a recent paper.

This type of ad hoc bilateral deal could give lenders too much sway over a country’s environmental governance, the paper argues. A lack of data and question marks over the amount of carbon removed by offsetting programmes both create a risk of greenwashing.

“In some cases it’s not the best way of managing the problem,” co-author Romain Svartzman, a senior economist focused on climate change at the bank’s financial stability unit, told Moral Money. “These things do not create systemic risk, but they can still create types of moral hazard, or nefarious effects.”

There is generally a correlation between climate risk and fiscal risk among low and middle income countries, IMF data shows. But the researchers’ most striking point is that this relationship should not be over-egged — countries with the highest levels of distressed debt are not always those with the most fragile ecosystems.

And because deals so far have come with high transaction costs and relatively small payouts for biodiversity projects, the swaps should not replace valuable work on debt cancellation mechanisms by the international community, they argue.

The Banque de France nonetheless identifies 15 countries for which the mechanism could be well suited, because of a combination of high deforestation levels, high forest cover and high levels of indebtedness to foreign creditors, including Ghana, Laos, Mozambique and Senegal.

Enthusiasm for scaling these deals could be in short supply. Debt-for-nature swaps were discussed at the biodiversity COP in Montreal last year, but left out of the final agreement, after strong opposition from NGOs. Countries signed a general agreement to increase biodiversity-related international finance from developed countries to $20bn a year, and to stimulate “innovative schemes” such as green bonds and biodiversity offsets. (Kenza Bryan)

Shell lawsuit signals a new hazard for board directors

As board members face growing pressure over corporate climate performance, some have faced shareholder rebellions over their reappointment at annual meetings. Now, a new legal front has opened up.

Non-profit group ClientEarth has filed a legal claim against all 11 directors of the oil company Shell, accusing them of having breached their duty under UK law to handle risks around climate change and the energy transition.

Since its foundation in 2007, London-based ClientEarth has been a thorn in the side of governments and companies across Europe, with a series of lawsuits over issues ranging from coal subsidies to drift net fishing. It’s now hoping that, by directing energy towards individuals, it can turn the heat up a notch.

“This is the first lawsuit of its kind — the first such claim where we are seeking to hold the board personally liable,” Paul Benson, the ClientEarth lawyer leading the action, told me.

Benson said his organisation had been taken aback by Shell’s response to the landmark 2021 Dutch court verdict, in which the company was ordered to cut its net carbon emissions by 45 per cent by 2030. Instead of scaling up the ambition of its energy transition plans, he noted, Shell simply launched an appeal. “The board’s response to that set alarm bells ringing not just for us but for many other investors,” he said.

Several of those investors have given their public support to the ClientEarth lawsuit — including pension funds Nest of the UK and AP3 of Sweden, and asset managers such as Danske Bank Asset Management and Sanso IS. Altogether, the institutional investors backing the suit control assets under management of more than $500bn, ClientEarth said.

In a statement, Shell rejected the ClientEarth allegations, saying its directors had “at all times, acted in the best interests of the company”. It noted that its shareholders had given 80 per cent support to its energy transition strategy at its last annual meeting — and that those backing the ClientEarth suit represented less than 0.2 per cent of its total shareholder base.

Still, the investor backing has lent some clout to ClientEarth’s argument that shareholders’ interests are fundamentally ill-served by a strategy involving continued investment in new oil and gas projects that risk ending up as stranded assets. Shell is far from alone in this. BP, for example, is still pumping most of its capital budget into fossil fuels — and this week scaled back its plans to reduce oil and gas production this decade.

But unlike BP, Shell has no target to reduce the absolute level of “Scope 3” carbon emissions from the use of its products, as ordered by the Dutch court. Instead it plans to reduce the “carbon intensity” of these emissions, giving it far greater flexibility.

A firm Scope 3 reduction target would be one of the key planks in the serious energy transition strategy that ClientEarth is pursuing, Benson said. He’ll now need to wait and see whether the court allows the case to proceed. Either way, board directors of carbon-intensive companies should be prepared for more cases in this vein. (Simon Mundy)

Smart read

From our colleague Stefania Palma in Washington, here’s a strong analysis of US authorities’ efforts to crack down on non-compete clauses, banned for trapping workers in jobs and harming competition in labour markets.