Landmark transaction will conserve one of the planet’s most valuable ecosystems
The Hague, 9th May 2023: Climate Fund Managers (CFM), the leading climate-centric investment firm, today announced the financial close of a new debt-for-climate conversion via its marine ecosystem venture, Oceans Finance Company (OFC), that will protect one of the planet’s most important ecosystems: the Galapagos Islands.
The Galapagos conversion, which is the largest in history, exchanged $1.628 billion in Ecuadorian government bonds for a $656 million impact loan. The transaction will generate savings to the Ecuadorian fiscus of $1.126 billion through 2041. In return, Ecuador will direct savings of $323 million by 2041 to the conservation of the Galapagos and establish a new endowment fund maturing to $227 million to finance their preservation thereafter.
CFM, through OFC, was one of the key advisors in the transaction. It developed the concept to fruition, led on the financial structuring and invested $2 million in early-stage development capital via its Climate Investor Two (CI2) Fund, an innovative blended finance vehicle focused on oceans, water and sanitation. Dutch Fund for Climate & Development (DFCD) and the European Commission (EC) amongst others provided the risk capital via CI2’s development fund. CI2, through a complimentary structure is expected to avail an additional $5 million per annum for conservation.
Debt-for-climate conversions are an innovative finance mechanism that exchanges a portion of government debt at more favourable terms, with savings spent on climate-positive action. Situated in a 200,000 km² Marine Protected Area (MPA) off the coast of Ecuador, the Galapagos are a biodiversity hotspot with the highest concentration of endemic species on the planet. Hampered by a lack of funding to enforce its protected status, overfishing combined with pollution and climate change has put the fragile ecosystem and the communities that depend on it at risk.
The conservation funds will protect the 60,000 km² Hermandad Marine Reserve (HMR), providing vital protection for marine life whilst also promoting sustainable fishing and tourism, enhancing ecosystem richness, and building resilience to climate change. Extending to the Cocos Islands, the HMR also provides a safe corridor along a key migratory route for endangered marine species including the Scalloped Hammerhead shark, Oceanic Manta Ray, Blue Whale and several species of marine turtle that move between Ecuador, Colombia and Costa Rica.
The funding availed will help physically protect the HMR through traditional methods such as patrolling but also via technology including drone monitoring and satellite imagery. Targeted funding will support community development initiatives including programmes to support sustainable livelihoods, women’s economic empowerment, improved access to sanitation and waste management infrastructure (which will ultimately help to reduce the harmful impacts of pollution on the marine environment), and educational campaigns.
Andrew Johnstone, CEO of CFM said: “Climate Fund Managers’ purpose is to end the climate crisis. We do this by raising and deploying blended finance funds at scale and at pace, working in partnership to deliver sustainable climate solutions. Debt-for-climate swaps are a cutting-edge climate solution that make significant, sustainable impact in a single transaction. The Galapagos conversion sets a new precedent which we are actively looking to replicate across our focus markets of Africa, Asia and Latin America.”
Erik Wandrag, CEO of OFC said: “The Galapagos are one of the most valuable and vulnerable marine ecosystems on the planet and this conversion will conserve them for generations to come. Each debt-for-climate conversion takes us a crucial step closer to achieving the global goals of conserving and managing 30% of the world’s lands and waters by 2030 and limiting global warming to 1.5°C.”
The conversion supports the achievement of OFC’s impact objectives, namely to: conserve 800,000km², protect 20,000 species including 1,000 that are endangered, mobilize $50m funding per conservation area including an endowment fund to continue funding post the arrangement period and improve the lives of 2.5m people.
About Debt-For-Climate Conversions
Debt-for-climate conversions are an innovative finance mechanism that optimize a portion of a nation or organization’s outstanding debt stock in exchange for climate-positive action. Capital structure is optimized and sustainable financing introduced, resulting in lower financing costs, increased capacity and stronger metrics that are more favourable to international capital markets. In exchange, the counterparty undertakes specific conservation commitments to conserve ecosystems of high significance, for example, coral reefs, rain forests and habitats of endangered species. Conservation efforts can include patrol boards, satellite imaging, drones, research & education, alternative income and more.
About the Transaction
The transaction involved a consortium of international organisations engaged by OFC to execute the transaction. Credit Suisse arranged and structured the $656 million Galapagos marine conservation-linked bond used to finance the debt conversion exchanging $1.628 billion in Ecuadorian international bonds for a $656 million loan. Credit Suisse acted as offeror for the international bonds. U.S. International Development Finance Corporation (DFC) provided $656 million in political risk insurance for the Loan while Inter-American Development Bank (IDB) provided an $85 million guarantee. A group of 11 private insurers is providing more than fifty per cent reinsurance to facilitate the project. CFM, via OFC, led the financial and ESG advisory and invested the high-risk development capital to develop the transaction via its Climate Investor Two Fund alongside The Pew Bertarelli Ocean Legacy Project. In return, Ecuador will spend $12.05 million a year on marine conservation in the Galapagos Islands, including support for the Galapagos National Park Service, and approximately $5.41 million on average to a newly established endowment Galapagos Life Fund, which is expected to grow to $227 million by 2041, to fund conservation efforts thereafter. Through this debt conversion, Ecuador will realize more than $1.126 billion lifetime savings through reduced debt service costs. The debt conversion will generate an estimated $323 million for marine conservation in the Galápagos Islands over the next 18.5 years. Combined, the debt conversion and endowment will generate more than $450 million for marine conservation in the Galápagos Islands.
About the Galapagos Islands
Situated in the Pacific Ocean, 1,000km off the coast of Ecuador, the Galapagos are one of the planet’s most unique ecosystems. Consisting of 13 main islands and 120+ rocky islets, they are a unique biodiversity hotspot, benefiting from the interplay of multiple oceanographic and climatological systems, including the direct influence of both the Intertropical Convergence Zone (ITCZ) and El Nino Southern Oscillation (ENSO) and the convergence of four ocean currents. Its remote, isolated location and unique geophysical environment allow for unusual levels of diversification and speciation. For this reason, the Galapagos holds the highest number of endemic species (those found nowhere else on the planet) with percentages standing at 59% of vertebrates, 57% of invertebrates, and over 39% of plants. Yet the very reasons that enable such high biodiversity also makes these islands vulnerable to climate change and other disturbances, such as overfishing or invasive species. Geographic isolation inhibits species’ ability to migrate elsewhere as the climate warms or disturbance disrupts habitats, resulting in the Galapagos having significantly higher extinction rates compared to other islands or continental ecosystems.
Climate Fund Managers (CFM) is the leading climate-centric investment firm. It designs and deploys cutting-edge blended finance funds at scale and at pace, working in partnership to co-develop, construct and own sustainable infrastructure solutions. Through its innovative model, CFM has created a blueprint for a new generation of climate financiers, whose collective impact can end the climate crisis. CFM currently manages two emerging market infrastructure funds: Climate Investor One (CI1), an $850m fund focused on renewable energy and Climate Investor Two (CI2), an $855m fund focused on water, sanitation and oceans. The firm invested in the Galápagos conversion via its CI2 fund. Dutch Fund for Climate & Development (DFCD) and the European Commission (EC) amongst others provided the risk capital via CI2’s development fund. The project is being managed by Oceans Finance Company (OFC), a company incubated within CFM focused on marine ecosystems. Established in 2015, CFM is a joint venture between the Dutch development bank FMO and Sanlam InfraWorks – part of the Sanlam Group of South Africa. The firm invests across Africa, Asia and Latin America and the HQ is in The Netherlands.
About Climate Investor Two (CI2)
Climate Investor Two (CI2) is Climate Fund Managers (CFM)’s innovative blended finance facility focused on water, oceans and sanitation. It reached its second close at USD 855 million in December 2022 and has a target size of USD 1 billion. The water, sanitation and oceans sectors are fundamental to human life and economic development and the medium through which the effects of climate change will be most felt on earth. CI2 provides expertise, technology, and financing to infrastructure projects in CFM’s focus markets of Latin America, Asia and Africa by mobilizing private sector financing at scale, supported by catalytic public sector donor funding.
Formed in partnership with Dutch Fund for Climate and Development (DFCD) and the European Commission (EC), CI2 uses the same blended finance structure as the firm’s inaugural blended finance fund Climate Investor One (CI1), which focuses on renewable energy. This structure simplifies the manner in which capital is deployed and reduces complexity by delivering an innovative “whole-of-life” solution that provides a single financing source for each of the respective development, construction, and operational phases of a project’s lifecycle. Through its CI2 Development Fund, CI2 provides early-stage project development services and financing. Through its CI2 Construction Equity Fund, CI2 provides equity finance that accelerates project construction. With this approach, CI2 is designed to implement more projects faster, delivering positive environmental and social impact sooner.
Oceans Finance Company (OFC) was founded to create a link between the impact benefits derived from the management of natural capital and nature-based solutions on the one hand and large-scale sources of blended finance capital on the other. The key role players in OFC have raised, managed, deployed and exited investments exceeding USD 30 billion over the past 20 years across various sectors in emerging markets.
 Endemic species are those found nowhere else on the planet
 Natural Capital can be defined as the world’s stocks of natural assets which include geology, soil, air, water, and all living things. It is from this Natural Capital that humans derive a wide range of services, often called ecosystem services, which make human life possible. Poorly managed Natural Capital becomes not only an ecological liability, but a social and economic liability too.
 Nature-based Solutions (NbS) are defined by International Union for Conservation of Nature (IUCN) as “actions to protect, sustainably manage, and restore natural or modified ecosystems, that address societal challenges (e.g. climate changes, food and water security or natural disasters) effectively and adaptively, simultaneously providing human well-being and biodiversity benefits”.