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August 29, 2023

Africa Climate Summit SIDE EVENT: Catalysing private-sector capital through credit enhancement for sustainability-linked sovereign financing

Event: Catalysing private-sector capital through credit enhancement for sustainability-linked sovereign financing

‍Event outline

To realize the required scale, sustainability-linked sovereign financing (such as debt conversions for nature/climate, sustainability-linked bonds) needs to be paired with credit enhancement mechanisms such as credit guarantees. The ratings uplift that guarantees provide allows vulnerable, lower/unrated sovereigns to attract sufficient lower-cost/ financing to ease their debt-servicing burdens and fund urgent climate and biodiversity programmes.

There is potential to deploy credit enhancement for sovereign borrowing at a much larger scale in Africa. These instruments make up only a fraction of IFI commitments because of, inter alia, misaligned incentives within IFIs arising from equivalent pricing and capital treatment of guarantees and loans. At an affiliated event co-hosted by SSDH, TNC, UNFCCC Climate Champions, and the COP28 organizers at the Paris Summit for a New Financial Pact in June 2023, the major IFIs, including the African Development Bank and MIGA, called for a collaborative approach to overcoming these barriers to scaling up credit enhancement. To that end, a Working Group on Credit Enhancement held a workshop in August 2023 among IFI technical staff to start the process of co-designing scaling mechanisms for IFI credit enhancement. This workshop will discuss these solutions for the African context and build consensus across the continent for this critical instrument to mobilize climate/nature financing.

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This event will focus on the following objectives

  • Showcase momentum of debt conversion deals globally and in Africa - including the recently closed Gabon debt conversion deal (DFC provided credit enhancement) and the AfDB recently announced interest to support a debt-for-nature swap;
  • Showcase the Design Sprint (which was held in Aug) and present its preliminary high-level findings on the optimal designs of collaborative credit enhancement mechanisms;
  • Explore applications of these climate/nature solutions for African sovereigns and sub-sovereigns in the context of escalating climate, nature, and debt crisis, referring to examples of successful usage of credit enhancement on the continent, and receiving feedback from key government, market, and civil society stakeholders from Africa;
  • Build interest and support for the prospective solution that is targeted for launch at COP28 to scale further sustainability-linked sovereign debt instruments


Additional Context

  • Gabon and The Nature Conservancy (TNC) have announced a new deal refinancing $436M of Gabon Eurobonds to create $163M of finance for ocean conservation over the next 15 years relying on $500M of credit enhancement from the United States government.

  • The Africa Development Bank announced it is looking to support these types of transactions and is actively talking to a potential country.

  • TNC, Nature Finance and the Climate Champions have held a workshop in late August in Washington DC with all of the major MDB credit enhancement providers (WB, MIGA, AfDB, ADB, IADB, GCF, and the US Government) to explore increasing credit enhancement for these transactions.

  • The Climate Champions and CoP28 Presidency are highly interested in continuing this work on credit enhancement for sovereign debt linked to climate and nature. The ACS is a critical milestone to advance this work in the lead up to COP28.

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