The Republic of Barbados will use savings from a recent debt swap arranged by CIBC Caribbean called the Sustainability Linked Loan to finance climate-resilient projects.

Last week the country completed the unprecedented debt-for-climate operation to finance water and sewage projects resilient to climate change with the support of its international funding partners. By replacing outstanding, more expensive debt with more affordable financing, Barbados generated US$125 million in fiscal savings which it will use to enhance water resource management and increase water and food security.

Prime Minister Mia Mottley welcomed the debt refinancing noting, “In the face of the climate crisis, this groundbreaking transaction serves as a model for vulnerable states, delivering rapid adaptation benefits for Barbados. With upfront funding from our partners, we are building a state-of-the-art facility to boost water management, food security, and resilience — showcasing how innovation and cooperation drive environmental and fiscal gains.”

Barbados is one of the world’s most water-scarce countries, havin an average per capita water availability four times less than the global average—a challenge set to worsen with climate change. It also faces a large annual food import bill as farmers lack adequate water to expand crop production.

The debt conversion therefore reduces the country’s financial burdens and facilitates the reallocation of funds to upgrade the South Coast sewage treatment plant into a modern water reclamation facility, among several associated facilities. The water reclamation facility, one of the first in the Caribbean, will produce water with suitable quality for use in agricultural irrigation and groundwater recharge.

Another benefit of having more fiscal space is that Barbados will invest in reducing water losses and improving its sewer system.

The Sustainability Linked Loan transaction closed last week, backed by US$300 million in guarantees —US$150 million each from the Inter-American Development Bank (IDB) and the European Investment Bank (EIB), the latter under the European Union’s Global Gateway Initiative.

“The European Investment Bank is providing innovative financing solutions to support those most vulnerable to climate change, alongside our partners, the Inter-American Development Bank, the Green Climate Fund and the European Commission,” said EIB Group President Nadia Calviño.

“As the ‘climate bank’, we are proud to be part of the first debt-for-climate resilience conversion, which will support vital investments in Barbados and could give us an important model for other such operations in the future,” she added.

For his part, IDB President Ilan Goldfajn described the debt swap as an “important milestone in several dimensions.

“It is the first debt-for-climate operation focused on climate resilience, paired with a groundbreaking financial innovation with unprecedented partnerships,” he stated.

“I will have the opportunity to be in Barbados in a few days to do a deep dive on this operation and related project and see how we can replicate this model in other instances. This is impact at scale with innovation and partnership at work,” the IDB president added.

With the support of the guarantees, Barbados secured a long-tenor, local currency loan at favourable conditions arranged by CIBC Caribbean, with regional banks investing in the transaction. The IDB and the Green Climate Fund (GCF) have provided a total of US$110 million in upfront funding for the project, including a US$40-million grant from the GCF.

“Debt-for-climate conversions can support responses to two overlapping crises: constraining debt and the escalating climate emergency. The Green Climate Fund is a proud partner of Barbados in bringing a coalition of financiers together, all backing an innovative financial instrument aimed at helping the island nation achieve its development and climate goals,” GCF Executive Director Mafalda Duarte explained.

IDB and CIBC Caribbean acted as Sustainability Structuring Agents with the support of CBIC’s Global Sustainable Finance Team. Sustainalytics, a leading provider of second-party opinions for sustainability-linked financial instruments, reviewed Barbados’ Climate Resilience Sovereign Sustainability-Linked Financing Framework to which the SSLL is aligned. They found that the Framework aligns with international best practices, assessing the Key Performance Indicator (KPI) as “strong” and the Sustainability Performance Target (SPT) as “highly ambitious.”

According to CIBC Caribbean’s Chief Executive Officer Mark St Hill, such an “initiative enhances climate resilience and sets a benchmark for sustainable adaptation for the Caribbean”.

He continued: “CIBC Caribbean is honoured to again collaborate with the Government of Barbados and multilateral agencies like the IDB and EIB in setting precedents for innovative financial mechanisms that drive environmental stewardship in our region. This partnership underscores our commitment to accelerating climate action and fostering sustainable development across the Caribbean.”

The debt-for-climate conversion has been structured as a Sovereign Sustainability-Linked Loan (SSLL), marking the first SSLL tied to a sovereign water security project. The sustainability targets underpinning the loan relate to the volume and quality of reclaimed water generated by the upgraded plant. If the targets are not met, the government incurs a financial penalty, which will be paid into a specialized trust for environmental investments, the Barbados Environmental Sustainability Fund.

The transaction will help Barbados advance its resilience plans outlined in the country’s Updated Nationally Determined Contribution (NDC) and its Investment Plan for Prosperity and Resilience, in alignment with the Paris Agreement and the country’s Roofs to Reefs Program, by enhancing climate resilience through increasing water availability and food security and preventing marine pollution.