In early May, a collection of environmentalists, banks, law firms, and investors celebrated a financial agreement to help save the Galapagos Islands. It may have been premature.
The deal — a debt-for-nature conversion that’s the largest of its kind in history — puts cash-strapped Ecuador in the tough position of trading sovereign control over a sensitive region for minor debt relief. In exchange, the islands have received soft guarantees of vague projects to be carried out by a Delaware-incorporated trust using Ecuadorian money.
Exploding demand for green finance has driven a worldwide push for solutions that can be both good for the world and profitable. But critics say that if Ecuador’s “blue” bonds are any indication, we are far from that goal.
“This is essentially Ecuadorian money being used for Ecuadorians, but we’ve ceded the administration to private actors,” said Daniel Ortega Pacheco, the former Ecuadorian environment minister and current head of a research institute at Escuela Superior Politécnica del Litoral (ESPOL) Polytechnic University. “There’s been a lot of criticism of ESG [environmental, social, and governance] finance, and to call these blue bonds undermines an entire trend of work on this issue.”
On paper, the deal looks great. It reduces Ecuador’s debt burden by over a billion dollars and provides about $12 million a year for conservation efforts in the Galapagos, as well as an additional $5.4 million to seed a permanent endowment — all over the next eighteen years. The details are less rosy, however.
Per the agreement, conservation funds will be spent by a special trust called the Galapagos Life Fund (GLF) — a limited liability company registered in Delaware. It’s run by eleven directors: five from Ecuador’s government and six outsiders ranging from for-profit investment manager Climate Fund Managers (through a subsidiary) to representatives of the local tourism and fishing industries. A nongovernmental organization (NGO) also has a seat at the table, currently and for at least the next two years occupied by the Pew Bertarelli Ocean Legacy Project.
The trust will hear requests for funding from local projects and disburse money accordingly. The idea is to invest in projects that will grow the economy of the Galapagos Islands — dominated by fishing and tourism — while protecting the vulnerable oceans of a region famous for its biodiversity.
This ecological patrimony is so important that it’s enshrined in the Ecuadorian Constitution, which guarantees the nation’s citizens the right to live in a healthy and ecologically balanced environment and protects against environmental damage.
The islands are also a matter of sovereignty for Ecuador. Because of them, the nation shares a maritime border with Costa Rica, and Ecuador has exclusive sovereign jurisdiction over the sea up to at least two hundred nautical miles from its borders (perhaps for that reason, Ecuador’s Ministry of Defense has a seat on the GLF trust).
Ortega Pacheco says there are alternatives with tighter control and oversight from Ecuadorian authorities or at least a process with significantly more transparency. But the Latin American nation, reeling from the pandemic, ravaged by an earthquake and flooding earlier this year, and more than $60 billion in debt, has few good options.
Economic precarity plus political instability (President Guillermo Lasso dissolved the National Assembly to avoid an impeachment vote and will not stand in the upcoming election) means the country isn’t exactly a market darling. Moody’s Investors Service, which rates the creditworthiness of debt, put a “junk” Caa3 credit rating on Ecuador’s government bonds in a signal that the nation is extremely likely to default. By contrast the Galapagos Marine Bond, issued through an Irish special purpose vehicle, carries a Aa2 rating — the third-highest possible and sixteen levels above Ecuador’s.
To secure that cheaper financing and debt reduction, Ecuador must put its faith in the good intentions of a board where the nation only has minority control. Ecuador’s Ministry of Economy and Finance did not respond to calls and messages requesting comment.
In a developed country, “this would be unthinkable,” said Ortega Pacheco in an interview conducted in Guayaquil, Ecuador. “But because it’s in Ecuador, well, it’s because they have weak institutions — there’s always a North-South logic that guides this type of thinking.”
All that might be easier to swallow if the GLF trust had a clear mandate. Green bonds are sometimes tied to specific projects, but the role of the GLF in the Galapagos is vague.
Giuseppe Di Carlo, director of the Pew Bertarelli Ocean Legacy Project, says that the trust will spend money under four pillars: achieving effective management, upgrading fisheries, promoting sustainable tourism, and fostering the “blue” economy. This sort of phrasing is typical in the green financial industry, which thrives on hazy promises that protect both issuers and investors if nothing green actually happens.
Di Carlo says that the GLF trust is still being built and that the categories are vague because the whole enterprise is still getting off the ground. Still, he’s conscious of the accusations of “greenwashing” that have plagued the rest of the industry.
“The money can’t be used in any other way, and when the endowment is fully funded, it will continue to fund conservation at the same level,” he said. “We’re aware of the criticisms of other transactions like this, and we’ve been trying to build ways of doing this differently.”
Di Carlo says that the structure of the trust will help this goal: Ecuador’s minority seats will ensure government buy-in, while the external actors can make sure the money goes to worthy projects.
If the money doesn’t go to worthy projects, however, there’s little anyone can do to stop it. The only oversight over the spending activities of the GLF trust is the GLF trust itself. Adrián Garza, the Moody’s analyst who rated the Galapagos bonds, says that even if the spending isn’t aligned with conservation or Ecuador withdraws funding for the trust, investors who bought the bonds are unlikely to act.
Technically, Garza says, investors could — after a lengthy process of repeated underfunding of conservation activities — maybe demand immediate repayment of Ecuador’s obligations in a process known as acceleration. A lot of things would have to go wrong, and the chances of success are so uncertain that he waved off the possibility as an extremely small risk.
“If Ecuador is making the loan payments, but maybe, to some extent, failing on the other part of the equation with conservation activities, bondholders are still being paid,” he said in an interview from Mexico City. “They don’t have a strong incentive to accelerate.”
For Quinn Curtis, a law professor at the University of Virginia, this lack of enforceability is the core of the problem for green bonds.
“If investors are sincere in wanting strong, credible instruments that have some teeth, it’s not terribly difficult to create them,” he said. “But if investors want to say they have green elements in their portfolio without any risk of sacrificing return and are willing to accept superficial commitments in order to get that green label, then we’re missing the market mechanics that would lead to that credibility.”
If anything, he added, Ecuador’s independent trust is something of an improvement. Most deals don’t even have that.
“This market could generate more credible instruments,” he said. “The question is: Does it want to?”
Still, prospects are growing dimmer for a corner of the world that’s been famous for its biodiversity since a young Charles Darwin first set foot on the islands in 1835. Conservationists are hoping that the massive debt deal will at least accomplish something.
“All these things need financing, and the conventional means of fundraising isn’t going to cut it. It’s got to come from governments, it’s got to come from finance somehow, we need to find ways of making it work,” said Tom O’Hara, a spokesperson for the Galapagos Conservation Trust in London. “It’s just that you need to make sure that it really delivers and it’s not just a flurry of press releases and then ten years later the money isn’t forthcoming.”