CSF recently hosted a panel discussion with three national and international experts on the role of nature-linked sovereign debt instruments in Sri Lanka’s economic recovery, amidst debt distress and acute environmental pressures. This conversation builds on CSF’s ongoing work on climate finance, under our research thematic of ‘Nature, Climate, and the Economy’. The session, led by CSF Director Anushka Wijesinha, featured Lucy Emerton (Environmental Economist), Deshal De Mel (Economic Advisor to the Ministry of Finance), and Ranga Pallawala (EU SWITCH- Asia Programme Climate Change Policy expert). The session discussed the role that nature-linked sovereign debt instruments can play in Sri Lanka’s economic recovery and unlocking new sources of finance. The experts shared their views on how Sri Lanka may best position itself to take advantage of nature-based financing, with a particular focus on Debt-for-Nature-Swaps. CSF has published an Analytical Note based on the views that emerged in the discussion with the panel, summarizing ten (10) key themes that Sri Lanka needs to consider. Download the Analytical Note here – ‘Nature-linked Sovereign Debt Instruments: 10 Key Considerations for Sri Lanka’.

The 10 key messages are:

1. Debt-for-Nature Swaps are feasible in a post-debt restructuring scenario
2. Factor in global conditions when Sri Lanka returns to international capital markets
3. Build national institutions and capabilities that encourage inclusive and multi-disciplinary approaches
4. Adopt an integrated approach to the use and management of proceeds
5. Foster discipline and good governance in administering earmarked funds
6. Create greater flexibility in use and management of proceeds
7. Think about instruments more broadly and build a bigger toolbox beyond DFNS
8. Bridging gaps in understanding among professional communities
9. Stakeholder engagement to address fears around loss of sovereignty
10. Clever identification of investors and what they are looking for.

The overall takeaways are that:

• Sri Lanka has a traditional outlook on nature-based finance, and this will limit the way proceeds can be utilised and managed. Innovative and integrated environmental, financial and development planning approaches are needed, embedded into the institutional framework.
• The post-debt restructuring environment, with more rigorous fiscal governance measures, is the ideal time to place the required building blocks ahead of Sri Lanka’s return to capital markets in 3-4 years.
• Existing public budget mechanisms led by the Treasury and anchored to the consolidated fund will need to be complemented by well-governed and inclusively managed special purpose vehicles like conservation trust funds that can allow for greater diversity of instruments and funding sources.
• Through this, Sri Lanka can broaden the investor and beneficiary base and increase the impact of cross-cutting environmental and climate projects.
• Sri Lanka must be mindful of unresolved community-environment tensions, weak public financial management, gaps in understanding of instruments and use of proceeds, and negative perceptions of private capital in conservation.
• Underpinning the success of any sustainable finance mechanism will be the genuine and holistic engagement of people who have a stake in DFNS and related instruments.

The session was part of a collaborative media series with Echelon Media on a ‘Nature-Positive Economic Recovery for Sri Lanka’. The full video is available to watch here.