The recent scandal involving FTX and Sam Bankman-Fried (SBF), the apostle of “effective altruism,” should have raised for Catholics, once again, these questions—Is it easy to do good by giving away large sums of money? Or do large sums of money tend to corrupt those who wield them and ruin those who receive them?
Also, are we going to see additional cases in which someone’s expressed concern for “the climate” serves as a cloak to hide self-interested motives?
These questions arise sharply in connection with a financial arrangement which has been getting a lot of attention recently, an arrangement known as a “debt-for-nature swap.” Once you understand the transaction, you’ll see the problems immediately. Let’s approach it step-by-step.
Orthodox. Faithful. Free.
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Imagine a dairy farmer whose farm is on a large tract of land, which he owns, in a valley surrounded by a nature preserve. For many years, nature conservancy groups have wanted to buy the farm, to block any further development there. The farm already spoils the view and is bad enough, they think.
Suppose one year the farmer has a hard time paying his creditors, including an investor who holds a $100K mortgage. He proposes to the investor, and the investor agrees, to convert the mortgage into an ownership share in the farm of equal amount. This would be a “debt-for-equity swap.” The arrangement decreases the farmer’s liabilities; and perhaps it helps him get a better credit rating, so that he can refinance his remaining debt at lower interest rates. It’s potentially a very good solution for him.
Consider next this case. As before, the farmer is having a hard time paying his bills. This time, however, he calls his attorney, who draws up an “easement” (or restriction), which cedes in perpetuity any right of any owner of that land to develop the property. He sells this easement to a nature conservancy trust for (say) $1 million, which (let us say) is the difference in value between the property without and the property with the easement.
He can continue to use the land, and he still owns it. But anyone’s rights to do anything more with the land have been sold. (The nature conservancy trust solicits donations precisely for the purpose of buying such easements. It becomes the owner of the ceded rights and undertakes to ensure that no development ever takes place.) The farmer uses the money from the sale to pay off his bills. This kind of arrangement, also fairly common, is called a “conservation easement.”
In the first case, the farmer saved himself from desperate straits by giving up some of his property. He “swapped” his debt for a loss in equity. In the second case, he saved himself from desperate straits by giving up his property too, but, more specifically, he gave up some rights over his property. Since the effect of ceding those rights is that the land is conserved, you might say that he engaged in a “debt-for-conservation” swap. His debt was, so to speak, “converted” into conserved land.
Now, consider a third case. Environmental activists succeed in changing local laws in such a way as to endanger the farmer’s business. They have wanted to force a crisis. When they see that the farmer is on the verge of bankruptcy, they show up with a “conservation easement” drafted by their own lawyers, which they propose to buy from the farmer for something less than the loss he sustains to his property—the difference, they say, is to cover their expenses. The farmer believes he has no choice and goes along with it. With the money from the sale of the easement to the trust, the farmer pays off much of his debt.
With this third case, we are clearly getting into the realm of the unethical because the farmer is being dealt with coercively, to achieve the goals of environmental activists, not goals which he himself would otherwise have pursued.
At this point, you are in a position to understand a “debt-for-nature” swap. I will present an actual case. Belize is a small country on the coast of Central America blessed with extraordinary barrier reefs. The reefs team with diverse species of fish and are cherished by wealthy tourists who fly there in order to snorkel. The reefs are undeniably a natural wonder.
Belize, like many developing countries, is burdened by the debt it owes to wealthy countries. By 2020, its debt burden had risen to 130 percent of its GDP. Because of Covid lockdowns on tourism imposed by wealthy nations, for almost two years it lost much of its revenue from its main industry of tourism. It was in desperate straits. It could not make payments on foreign debt, and it had to cut back on many public services; for example, in late 2020, it cut 27 percent of its funding, or $7 million, for its main university, the University of Belize—a devastating cutback.
Enter the environmentalists, represented by The Nature Conservancy which, with its $6 billion in assets, $1.3 billion in annual revenue, and C-suite executives compensated at close to $1 million per annum, is the 20th largest charity in the United States.
Now understand, as background, that currently ESG (“environmental, social, governance”) ethical criteria for investments are all the rage. Many investors are willing to get lower returns if they think that investments advance environmental goals. Moreover, many financial institutions look to buy ESG “credits” which they can then use to offset investment activity elsewhere in companies like gas and coal enterprises. They may also believe they can improve their reputations through ESG investments.
So then, would anyone be willing to advance money to help Belize? Credit Suisse bank came forward with $364 million it raised from ESG-conscious investors. Belize borrowed this sum and conveyed it to its creditor nations. These nations, in exchange, wrote off $553 million of Belize’s debt (a 45 percent markdown). Belize agreed to pay back this new loan at a lower interest rate than the earlier debt, and over a longer time period. In exchange for the write-down and restructuring, it agreed to spend $84 million on conserving its coral reefs. It also agreed to convert 30 percent of its coastline to nature preserves in perpetuity.
Oh, I forgot to say that despite the apparently impeccable ESG creds of this scheme, Credit Suisse was able to raise the money, which it fronted to Belize, only on condition that Belize’s repayment of the loan would be guaranteed by the U.S. International Development Finance Corporation—that is to say, U.S. taxpayers like you and me were made cosigners.
The deal has been celebrated as a wonderful example of public-private cooperation to achieve debt relief while helping to save the planet. It was by far the largest debt-to-nature swap to date. Supporters say it will be a model for many, larger such transactions in the future.
But look more carefully at the deal. Do you see anything troubling about it? Yes, the taxpayer exposure is a concern (did anyone ever ask us?) Also, as there is zero evidence of Covid transmission outdoors, did Belize support the lockdowns of its tourism industry, or were they imposed by us? Did we, in effect, force a financial crisis on Belize, which has only been made worse by our inflationary government spending and central bank policies?
Again, might not Belize be better off spending the saved money on its people, such as its struggling university hanging by a thread, rather than on coral reefs favored by wealthy tourists? Don’t developing nations need universities? Again, if its debt can be written off at all, why not write it off as Christian charity, for the human beings involved, rather than force a permanent concession from a desperate debtor, for “the environment” rather than the human beings?
Is the deal truly admirable, or is it do-gooderism which cloaks some unsavory, selfish motives?
Consider that a study by the U.N. Conference on Trade and Development found that Belize was encumbered with $86 million in fees and other expenses in the deal, which would make it the most expensive debt restructuring in history. Credit Suisse has so far not disclosed how much it made on the deal.
We should view the environment as “our common home,” as Pope Francis has eloquently taught. Within a Christian viewpoint, it is easy to do so. But one fears that, in the world of modern finance and even international development, when “climate” or “the environment” becomes someone’s motive, it is easy to instrumentalize human beings. Developing nations may be at risk of being treated, once again, like clients and colonies—while we salve our consciences that ESG criteria have been met.
[Photo Credit: Getty Images Entertainment]