To avoid bankruptcy, Sri Lanka may have to get tougher on climate change

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(Bloomberg) — Sri Lanka is hurtling towards international debt default and needs to restructure. His government might be surprised to find that a group of his creditors have more than money on their minds.

One of its lenders, the asset management unit of Nordea Bank Abp, wants to tie any deal to climate goals, according to a letter from the asset manager to Sri Lankan authorities last month that has been seen by Bloomberg. In the letter, the Helsinki-based official outlined goals set under the Paris Agreement, including increasing forest cover, reducing greenhouse gases, achieving 70% renewable energy in electricity production by 2030 and carbon neutrality by 2050.

“Sri Lanka has the unique opportunity to become the first country to have all of its international obligations aligned with the Paris agreement,” said Thede Ruest, head of emerging market debt at Nordea, who signed the letter. The asset manager seeks support from other creditors. To succeed, he will need it because he owns less than 1% of Sri Lanka’s international debt.

Sri Lanka is in a precarious situation. Unable to both service its debt and buy enough food and fuel for its people, it stopped all payments on its foreign debt and faced its first default since independence. Britain in 1948. While the World Bank has so far stepped in to help pay for food and medicine, debt restructuring is essential to securing a bailout from the International Monetary Fund.

In March, the country had less than enough dollars in its foreign exchange reserves to buy a month’s worth of imports such as food and fuel after the pandemic, then war in Ukraine decimated its tourism industry .

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Nordea’s move is the latest iteration of a slowly emerging trend in the fund management industry: using sovereign debt negotiations to advance a climate agenda. In November, Belize and its creditors, with the help of US charity The Nature Conservancy, agreed to a $553 million restructuring that saw the government commit to spending millions on marine conservation .

Convincing countries and creditors to agree to such demands is not easy. Governments are reluctant to craft policies based on demands from fund managers, and bondholders might care more about making money than pushing for green pledges.

Some recent efforts have been unsuccessful. In 2020, Ecuador rejected a proposal to eliminate fuel subsidies that encouraged the use of gasoline, and the following year Argentina resisted the possibility of obtaining lower coupon payments if it achieved objectives related to the ambitions of the United Nations in terms of education and drinking water.

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Ruest thinks proposing goals that Sri Lanka has already committed to makes his suggestion easier to digest.

“The ESG element is becoming a recurring feature of restructurings,” said Joe Delvaux, emerging markets distressed debt portfolio manager at Amundi SA, who has been involved in debt negotiations with the Ecuadorian and Argentinian governments. “It’s not always successful for various reasons, but it’s become a difficult subject to avoid.”

Sri Lanka’s Finance Minister Ali Sabry did not immediately respond to a request for comment.

Amundi is one of Sri Lanka’s creditors and part of the debt is held in funds supervised by Delvaux. The asset manager will also raise environmental, social and governance issues when the time comes, Delvaux said.

Ajata Mediratta, president of Greylock Capital Management, a Connecticut-based hedge fund that was among creditors pushing Belize to adopt climate targets, said bondholders are increasingly open to including such goals in debt restructurings, but that it has to be something that works for both the country and its creditors.

“We are still in the early days, and months of hard work lie ahead of us before the real negotiations begin,” Mediratta said, referring to the talks in Sri Lanka.

BlackRock Inc. and Pacific Investment Management Co., which are among Sri Lanka’s top creditors, declined to say whether they plan to use the debt talks to advance an ESG or climate-related agenda.

©2022 Bloomberg LP

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