It is estimated that as a result of climate change, Argentina could lose up to 4% of its GDP to drought by 2050. In addition, the country is ranked 12 among those that have deforested the most, and Chaqueño Park is the second largest deforestation hotspot in South America. This constitutes a worrying crisis of ecosystem and biodiversity loss. Fiscal space to address these situations is currently limited. The possibilities for increasing domestic financing are also limited. This is why we need innovative financial instruments.
Illustration: Micaela Nanni.
The triple crises and the funding gap
The notion of the “triple crisis” refers to the challenges faced by emerging and developing economies (EMDEs) in terms of ecosystem and biodiversity degradation, life on a warming planet, and high levels of debt. Through its analysis, it also seeks to understand how these components interact.
The concept of the “financing gap ” refers to this difference in the resources that are needed to ensure that the climate and biodiversity targets are met and the investments that are made. Infrastructure projects, new technologies, and conservation offset schemes, among many other elements, converge in a common need: financing.
When it comes to biodiversity, the global funding gap was estimated to be between USD 598 billion and USD 824 billion per year. For size: global conservation spending ranged between USD 124 and 143 billion per year when the total estimated need is between USD 722 and 967 billion per year.
Innovation as an instrument
In this context, there is a call to scale up financing through the implementation and execution of innovative financial instruments to simultaneously address the three challenges of debt, climate and biodiversity. While there is no internationally agreed definition of “innovative finance”, its origin is explained as part of the debate on the availability of finance for development objectives (beyond environmental and climate).
Such instruments often prioritise the environmental sustainability performance of projects and can make investments more effective. They could also be the means by which the value provided by nature and biodiversity is recognised and thus monetary returns can be obtained through natural capital conservation practices, beyond mere transformation.
This working document aims to analyse three innovative instruments for raising climate and biodiversity finance: green bonds and sustainability-linked bonds (SLBs), Payments for Ecosystem Services (PES) and debt swaps for climate and nature. We review their use in other countries and then assess their development in Argentina.
Green bonds and SLBs
Bonds are fixed-income instruments used to raise funds to finance various investments. When a bond is issued, the issuer is essentially borrowing a principal from investors with a commitment to repay it at a future date, along with interest period payments (or coupon payments). The idea of fixed income comes from the fact that the interest rate is known.
With increasing global needs to meet climate, environmental and social objectives, green, social and sustainable bonds have emerged, commonly grouped under the term GSS ( green, social and sustainability) bonds, and more recently another type of thematic bond has been introduced: the sustainability-linked bond(SLB).
GSS bonds are characterised as “use-of-proceed bonds”, as the funds are committed to specific future projects (or to refinance a portfolio of existing projects). This creates the need to track the use of the funds to ensure that the invested capital is being used to meet pre-set environmental objectives.
For their part, SLBs are more innovative than GSS bonds, as they can adjust some of the structural and financial characteristics depending on the degree of compliance with certain previously defined environmental, social and governance sustainability objectives.
With the environmental commitments made by countries in the 2015 Paris Agreement and the establishment of standards for their issuance, outstanding green bonds grew from USD 42 billion in 2014 to USD 542 billion in 2023. As for SLBs, they have seen remarkable growth since their first issuance in 2019, peaking in 2021 at USD 113.9 billion.
The Argentine bond market as a whole is one of the smallest in the region. If we take bonds issued by the corporate sector relative to GDP as a proxy for the size of the bond market, Argentina has one of the lowest figures globally, including regional peers such as Brazil, Mexico and Chile.
Despite the small size of the debt market and macroeconomic instability, the green bond and SLB market in Argentina, nascent compared to the region, showed great dynamism in the last five years.
From the first green bond issuance in 2019 to 2023, total green bond issuance listed in the “Panel for Green, Social and Sustainable Bonds” of the stock exchange “Bolsa y Mercados Argentinos” (ByMA) increased at a cumulative annual rate of 12%, with uninterrupted annual increases. According to data from the National Securities Commission (CNV), a total of forty green bonds had accumulated by 2023, amounting to USD 944.9 million. Part of this increase is due to the development of guidelines by actors such as the CNV and the ByMA for the issuance of bonds in line with international standards.
Payments for ecosystem services
Payments for Ecosystem Services (PES) schemes are market mechanisms that establish that those who benefit from ecosystem services pay the landowners of those lands. The landowners then commit to conservation and restoration actions, thereby ensuring the continued provision of ecosystem services. These actions may include planting trees, preserving riparian areas, and using sustainable agricultural techniques, among others.
According to estimates, there are more than 550 active programmes worldwide and an estimated USD 36-42 billion in annual transactions. Latin America was a pioneer in establishing PES schemes funded or implemented largely by national governments.
Selected experiences of Payments for Ecosystem Services (PES) in the region
| Country | Number of current projects | The number of hectares benefited | Type of PES |
| Costa Rica | 3289 | 205.645 | Financial recognition by the State to owners and possessors of forests and forest plantations for the environmental services they provide and which have a direct impact on the protection and improvement of the environment. |
| Mexico | 3221 | 2.3 million | Economic incentives for forest landowners to implement good management practices. |
| Peru | 52 | From very small catchments (922ha) to large catchments (1,721,343 ha). | Recognition of the benefits that watershed ecosystems provide to water users. Benefits include hydrological regulation in a watershed (ensuring water flow), availability of water in rivers for different uses, and erosion and sediment control, among others. |
PES can be effective instruments to address environmental conservation and restoration, and at the same time can be combined with poverty reduction objectives by adjusting their registration and targeting criteria to prioritise vulnerable communities.
In Argentina, the provinces of Misiones and Chaco present some initiatives that are at the forefront of the country.
Misiones has one of the largest pristine forests in the world and is home to 52% of Argentina’s biodiversity. In 2009, it passed the Law on Payments for Environmental Services (Law XVI-103), which established the framework for the implementation of PES programmes, and pioneered implementation at the provincial level with the payment for water services scheme in the Campo Ramón Stream Basin in 2017.
Chaco has evaluated different ways of valuing its main natural heritage, the Parque Chaqueño, which is the forest region with the largest area of native forest in Argentina. One initiative was the Ecotoken, a financial asset based on tokenisation and the use of blockchain technology. This would allow the generation of resources through payments in compensation for the ecosystem services that the province offers to the world.
Debt swaps for climate and nature
Climate and nature debt swaps can be a great solution for many countries facing heavy debt burdens. They are transactions where the creditor provides debt relief to a sovereign debtor government that commits to allocate part of the savings to investments to achieve climate, biodiversity and other Sustainable Development Goals (SDGs).
In Argentina, there is no experience with the use of this type of instrument. Some reports suggest that Argentina is a typical case of a debtor country that could rely on its position as an environmental creditor to negotiate debt reductions through debt swaps. As an environmental creditor, Argentina would have a strong environmental governance regime under the Minimum Standards for Climate Change Adaptation and Mitigation (Ley 27.520 ), for the Environmental Protection of Native Forests (Law 26.331) and for the Preservation of Glaciers and the Periglacial Environment (Law 26.639). This is fundamental in the context of commitments assumed in the framework of a negotiation such as debt swaps.
Despite these favourable conditions, the consensus in the literature is that debt swaps are not a viable option in cases such as Argentina, where there are doubts about the sustainability of public debt. Should a renegotiation of its obligations be required, traditional restructuring methods involving a substantial proportion of the debt would probably be more appropriate.
Debt swaps could be a financing tool with great potential once Argentina stabilises its economy and regains access to international markets.
Opportunities for instrument development
At the global level, the promotion of innovative financial instruments for biodiversity and climate is an issue that is at the forefront of the agenda in Argentina. However, it is far from being at the forefront of Argentina’s agenda and the scaling up of innovative financial instruments is, in general, at a stage of low maturity with pockets of development depending on the type of instrument.
Three common conditions necessary for the scalability of innovative financial instruments can be listed:
- A solid institutional framework and articulation between actors.
- Project incubation and availability of a diversified and robust portfolio of investment projects.
- Macroeconomic governance.
