Michele Leung, Green Finance Advisor of Friends of the
Investors are paying
more attention to the corporate governance with increasing sophistication in
ESG investing. Within the corporate governance, there are different governance
themes like board, pay, ownership & control and accounting.
ownership is one of the key topics, especially in the mainland China and Hong
Kong markets where controlled ownership was prevalent. High levels of founder-
or family-controlled firms are found in this region, for example, around 74% of
mainland China companies and 86% of Hong Kong companies had a shareholder or
shareholder group holding 30% or more of voting rights, compared to 46% of the
overall constituents of the MSCI ACWI Index, and 71% of the MSCI Emerging
Markets (EM) Index. At the same time, Greater China is also seeing higher
average director tenure and higher entrenched board ratio. This may suggest a
problem with the board skills and diversity. The definition and threshold of entrenched
board may vary across different investors, it usually includes the considerations
like the board tenure (whether it is over 15 years), the age of board members (whether
it is over 70) and the board refreshment rate.
in companies with entrenched boards may face greater governance risks,
especially with the lack of a publicly disclosed succession plan. Minority shareholders may also start to call
for new board appointments and more independent members on companies’
nomination committees to help protect their long- term interests, especially at
firms with high average director age and tenure.
diversity topic is gaining traction. According to MSCI Emerging Markets IMI,
which captures over three thousand large- and mid- and small-cap companies
across 24 emerging markets, on average, companies with at least one
female director had higher human-capital management performance than
those without any female directors, i.e. human capital score is at 4.3 compared
with 3.7 on a 0-10 scale. The difference was even greater at
companies that had at least three female directors or 30% women on
the board, it might be a potential “tipping point.” With APAC
region’s regulatory efforts to increase the presence of women on
boards, it will be interesting to see if there is any improvement of
companies’ human capital management in the long run.
addition, the average age of newly appointed directors is on track to hit
a record high next year, with first-time male directors in developed
markets approaching the age of 60. It is also observed the women and
emerging-market directors are younger, in the age range of 52 to 54. Amid
ongoing global demographic shifts, the nomination committees may consider the
potentially significant implications of age for director skill sets, as
well as for board continuity and diversity. At the same time, investors may
demand to have a better transparency and insight on the corporate governance
Alexandra Tracy, Green Finance Advisor of Friends of the Earth (HK)
the global policy response to Covid 19, and with the war in Ukraine pushing up
energy and food prices, debt levels are spiralling for many developing
countries. As of December 2022, the world’s
poorest countries owed US$62 billion in annual debt service payments, an
increase of 35% over the previous year. The rising debt load puts immense
pressure on emerging economies, leading to greater risk of defaults by their
the same time, the most highly indebted countries are in many cases also those
that are most vulnerable to the impacts of climate change and the resulting
loss of biodiversity. Research by the
International Institute for Environment and Development (IIED) found that five
of the top ten countries most affected by extreme weather events in 2019 (Mozambique, Zimbabwe, Malawi, Afghanistan and South
Sudan) were either already in debt distress or at high risk of becoming
is the terrible conundrum that emerging market governments need to try to solve. Countries that most urgently need to invest
in climate adaptation and resilience are the least able to afford it because
their budgets are burdened by debt.
Innovative debt swaps
of the solution to this challenge could come in the form of innovative “debt
for nature” swaps.
debt swaps are a financial mechanism which allow a government to agree with its
creditors, – who might be other governments, development banks or commercial
financial institutions – to change the terms of its loan obligation to make it
more manageable. By negotiating more
favourable conditions, such as lower interest rates or longer repayment terms,
debt swaps can help the world’s poorest nations to avoid default and to
redeploy part of their debt service costs to invest into policy
priorities. (Creditors are also likely
to support a proposal that reduces default risk and ensures that at least part
of the loan is eventually repaid).
the case of debt for nature swaps, debt restructuring comes with a commitment
from the debtor government to ensure action on climate, biodiversity or
environmental protection, and part of the scheduled repayments will be
reallocated for investment to support these targets.
for nature swaps are not entirely new – the government of the Seychelles in
2015 pledged to protect 30 percent of its territorial waters as part of a debt
restructuring deal, for example – but the few transactions
that have been completed tended to be relatively small.
Belize agrees swap for marine
began to change in 2021 when Belize’s government reached an agreement with conservation group The Nature Conservancy under which
its external debt would be reduced by US$553 million, or 10 percent of national
GDP. Belize was able to buy back part of
its existing debt at a discount and replace it by issuing US$364 million of
blue bonds. The US government’s
development bank, the International Development Finance Corporation,
also provided support for the deal.
In return, the Belize
government agreed to spend around US$4 million every year on marine
conservation until 2041. It will
increase the area of its marine protection parks – containing coral reefs,
mangroves and sea grasses, which are habitats for some 1,400 species – from almost
16 percent of its oceans to 30 percent by 2026. In addition, an endowment fund of US$23.5 million
will finance conservation after 2040.
Similar swap deals
number of developing countries are currently in negotiations to implement
similar swap deals.
Cape Verde, an archipelago nation off the coast of West Africa, signed an
agreement with the government of Portugal worth nearly US$200 million to swap
part of its debt for investment in an environmental and climate fund. Ecuador is in talks with creditors and the
Pew Charitable Trust about restructuring as much as US$800 million of
indebtedness and reallocating the resulting savings from lower debt service to
protecting the ecosystem in and around the Galapagos Islands. Sri Lanka, which defaulted on its debt in
2022, is also thought to be discussing a deal worth as much as US$1 billion.
experts believe the potential to free up capital for investment in climate
resilience and biodiversity through debt restructuring is considerable. Research by the IIED last year found that
debt relief in countries in or at high risk of debt distress could help to make
around US$105 billion of government finance available for climate and nature.
order for debt for nature swaps to have a real impact, the number and size of
transactions must be scaled up significantly.
There needs to be greater standardisation to move from niche products,
often linked to small projects that are expensive to structure and monitor, to
more mainstream instruments. Improvements
are also needed in how government pledges on nature and client are monitored
and verified so that creditors will be satisfied that countries are meeting
But already debt for nature
swaps are making an important contribution to allowing developing nations to
tackle climate and biodiversity challenges, as evidenced by the growing number
of governments hoping to replicate the successful case studies. As confirmed by Patricia Scotland, Secretary
General of the Commonwealth (which represents 56 countries around the world):
“Lots of my members are looking at it and we’re looking at it with them”.