Nature-based solutions (NbS) can – if properly designed and implemented – be a cost-effective approach to drive down global emissions, helping us build resilience to the effects of a changing climate, and improving human wellbeing.
Tapping into the extraordinary climate change mitigation and adaptation benefits of NbS will, however, require a significant increase in financing, to the tune of USD 598–824 billion every year between now and 2030.
Closing this yawning gap in nature and biodiversity financing will not be possible with public funds alone, which today make up over 80% of the investments going towards supporting nature-based solutions. We must mobilise private sector finance.
What is holding the private sector back from investing in NbS? In short: financially viable projects. Despite growing awareness among private investors of the opportunities presented by NbS investments, few NbS deals actually meet investor expectations. For example, the risk/return ratio of a vast majority of NbS, linked to several factors such as deal sizes, revenue streams and investment terms, are simply not attractive enough for private investors. As a result, the NbS market is gradually becoming limited by the lack of investment opportunities, rather than by a lack of interest from the investment community.
To help scale up investment in NbS, we must break down silos. Project developers and investors must start sharing business and investment models that have successfully managed to attract commercial investment. But what exactly do these models look like and how can they be replicated?
A new report developed by South Pole together with WWF investigated the key success factors in developing bankable NbS.
The study analysed a range of success factors, including project owners' and partners' expertise and track record; the effects of regulatory environments; dedicated feasibility assessment and technical assistance grants; the use of specific financial instruments (including concessional loans and guarantees); and the combination of several revenue streams.
It found that:
The findings of the study do not mean that successful projects cannot be recreated elsewhere. The key to replication is to adopt a flexible approach and identify locations where the main success factors (such as a crucial policy incentive) can be realised. For example, the Forest Resilience Bond, currently implemented in California, relies heavily on the involvement of public sector actors and could be replicated in other US states.
Knowing how to achieve bankability is one thing, catalysing investment at scale is another. How can we move from individual, small-scale projects to large investments across landscapes and seascapes?
First and foremost, investors and project developers need to learn from each other and share their experiences of different business and investment models, including traditionally sensitive information such as deal size and expected or realised returns. Meanwhile, the complexity of building and scaling the NbS marketplace will require cross-sectoral collaboration among various actors:
Philanthropic grants and other public sector finance have enabled the NbS marketplace to grow steadily over the past few years and will continue to play an important role in the future. However, continuing to rely on this type of traditional funding alone will not be sufficient to address the twin crises in climate and biodiversity.
The financial returns of the private sector are not incompatible with NbS. Presenting NbS as investable opportunities will be crucial to unlocking the large amounts of relatively untapped commercial finance. It is our hope that the success factors identified through this study will help provide the ingredients for project developers and investors to implement bankable NbS that deliver positive outcomes for both people and nature.
The report, Common success factors for bankable nature-based solutions, was co-developed by South Pole and WWF as part of the Climate Solutions Partnership, a collaboration between HSBC, World Resources Institute and WWF.
Image: Juan Leodan, a producer from the Origin Coffee Cooperative. Credit: Café Selva Norte