10 November 2022

ICMA publishes new climate resilient debt clauses to facilitate sovereign debt relief and financial stability

The working group, which included ICMA, developed new terms that provide for deferral of sovereign debt repayments to private creditors for a pre-agreed period and that can apply to a wide set of natural disasters and geographies...

The International Capital Market Association (ICMA) has today published new Climate Resilient Debt Clauses (CRDCs) which can defer a country’s debt repayments in the event of a pre-defined, severe climate shock or natural disaster.  A standardised term sheet for this has been produced by the UK-convened Private Sector Working Group (PSWG): sub-group on Climate Resilient Debt Clauses, with legal support from Clifford Chance. The PSWG brings together International Financial Institutions, including the International Monetary Fund (IMF) and World Bank (WB), G7 countries, borrowing countries, and the private sector, including major US and European banks and investment firms, legal and financial advisors specialising in sovereign debt, as well as academic experts.

The working group, which included ICMA, developed new terms that provide for deferral of sovereign debt repayments to private creditors for a pre-agreed period and that can apply to a wide set of natural disasters and geographies, building on the previous work by the IMF, ICMA and Clifford Chance under the Canadian G7 Presidency in 2018.  As well as supporting disaster resilience by freeing up cash flow, CRDCs could help avoid the liquidity challenges faced by low-income countries in such circumstances becoming costly payment defaults leading to protracted restructurings. This timely announcement at COP27 Finance Day directly responds to developing countries’ calls for such innovations at previous COP meetings.

Leland Goss, ICMA’s General Counsel said: “We live in a world today where countries are vulnerable to both growing debt levels and an increasing risk of climatic shocks. If sovereign borrowers can avoid default at the time of a natural catastrophe, this will benefit both affected countries but also their creditors and the global financial system that might otherwise be providing finance potentially simultaneously in multiple jurisdictions.”

One objective of the working group was to extend CRDCs beyond the Caribbean to a wider range of geographies, including the Pacific, Africa, Central and Southeast Asia. It also agreed that, while technically no country is excluded from scope, CRDCs were likely to be most suitable for low-income countries, Small Island Developing States, or other developing countries particularly vulnerable to the impacts of climate change. The impact of severe climate shocks or natural disasters on these countries can be particularly severe relative to their ability to respond in the absence of outside assistance.

Guidance Note relating to the new Climate Resilient Debt Clauses, which can defer a country’s debt repayments in the event of a predefined, severe climate shock or natural disaster

Term Sheet relating to the new Climate Resilient Debt Clauses

Additional information on Sovereign Debt

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