Introduction: A New Paradigm in Sustainable Finance
The world is facing unprecedented challenges, including the pressing need to balance economic growth with climate change mitigation and biodiversity conservation.
At the heart of this issue lies the recognition that nature-based solutions (NbS)* can provide a key to tackling these challenges holistically. In a recent paper presented by LSE Masters students at an internal ASI Knowledge Exchange Event, titled “Incorporating Nature into Finance: Scaling Up Nature-Based Solutions,” the authors propose innovative approaches and recommendations to scale up NbS and involve various stakeholders.
This op-ed delves into the key messages from the paper and advocates for greater collaboration and innovation in putting these solutions into action.
The Urgent Need for Nature-Based Solutions
As the global community grapples with the consequences of climate change and biodiversity loss, the importance of nature-based solutions becomes increasingly clear. NbS involve the restoration, protection, and management of ecosystems while addressing societal challenges. These interventions contribute to the UN’s Sustainable Development Goals (SDGs) and offer benefits for both people and nature. By integrating NbS into climate mitigation and ecosystem protection strategies, we can work towards a more sustainable and resilient future.
One of the critical aspects of scaling up NbS is the need for increased funding. The paper argues that blended finance, a financial approach that utilises public or philanthropic funds to attract and de-risk private sector investment, offers a more realistic approach to meeting the required financial flows. By using public funds to mitigate risks and enhance the business case for NbS, blended finance can help bridge the current financing gap and pave the way for long-term investment in nature-based solutions.
The reality today is that despite increasing financial commitments to invest in nature for climate action from private investors and development institutions, there is a shortfall in funding. NbS are largely developed without proper consideration of revenue generation opportunities, relying excessively on grant-based funding which is limited in scope and scale. Consequently, only about 3% of climate finance is used for NbS for climate mitigation, and less than 1.5% of climate finance is flowing to NbS for adaptation (Swann et al. 2019). The under-investment in NbS is exacerbated by the often challenging business conditions in Low-Income Countries (LICs). There is a dire need to develop NbS investment frameworks to overcome these barriers and fast-track the implementation of NbS. The outcome of such an intervention would be the creation of an investment framework that mobilizes long-term financing for NbS while also reducing harmful subsidies.
Blended finance will play a critical role in mobilising investment. A variety of instruments can be utilised, including grant financing, concessional financing, risk mitigation tools like guarantees, first loss equity, and green and nature swaps. Market mechanisms like carbon and biodiversity credits can play a part and debt for nature swaps are increasing in frequency. In order to unlock institutional investment from pension funds and asset manager will be the securitisation of cash flows from NbS benefits and the aggregation of smaller projects to reduce transaction costs, mitigate investor risk, and increase the scale of impact.
For example, the Inter-American Development Bank (IDB) has a track record of leveraging finance for NbS and supporting governments with policy implementation. From 2015 to 2020, the IDB invested over $800 million in 28 projects with nature-based solutions components. These projects leveraged an additional $437 million in financing from partners, amounting to nearly $1.25 billion in total project financing. Blended finance is positioned as a key driver of investment in nature-based solutions, however, it requires careful planning, structuring, and collaboration between stakeholders.
Innovative Financial Instruments
To attract private investment, a range of financial instruments can be utilised, such as carbon credits, biodiversity credits, debt swaps, and green bonds.
Carbon credits, for instance, put a price on greenhouse gas emissions and can be traded in carbon markets, incentivising businesses to reduce emissions and invest in conservation efforts, such as preventing deforestation.
Biodiversity credits, on the other hand, encourage the protection and restoration of habitats and species by assigning a monetary value to these resources.
Debt swaps allow debtor countries to exchange their debt for commitments to invest in environmental conservation or restoration projects, fostering a more sustainable use of resources.
Green bonds, often issued by governments or corporations, raise capital specifically for environmentally friendly projects, including NbS initiatives.
By incorporating these instruments into financial markets, we can create a strong foundation for scaling up NbS and promoting sustainable development.
Creating Conditions for Success
To be successful in scaling up NbS requires the creation of enabling conditions that address existing barriers and promote cooperation among stakeholders. The paper outlines several key conditions, including the adoption of natural capital accounting systems, institutional and regulatory support, adherence to the International Union for the Conservation of Nature’s (IUCN) Global Standards, and utilising the Taskforce on Nature-related Disclosure.
Natural capital accounting systems integrate the value of nature into national accounting, helping governments and businesses understand the economic benefits provided by ecosystems and their services. By incorporating nature’s value into decision-making processes, these systems can foster more sustainable development practices.
Institutional and regulatory support is essential for the successful implementation of NbS. Governments can demonstrate their commitment by incorporating NbS into Nationally Determined Contributions (NDCs), environmental regulation, land-use planning, and capacity building. Additionally, the involvement of local communities in decision-making processes ensures that NbS projects are tailored to the specific needs and priorities of those most affected by environmental challenges.
The IUCN’s Global Standards provide a comprehensive and systematic evidence base for NbS projects, incorporating eight criteria essential for success. These standards can be used by any stakeholder to assess the effectiveness of their NbS initiatives, ensuring that projects are designed and implemented with the highest possible impact.
The Taskforce on Nature-related Disclosure offers a framework for the private sector to understand the interdependencies between business and nature. By promoting transparency and disclosure of nature-related risks and opportunities, the Taskforce encourages businesses to integrate nature-based considerations into their decision-making processes.
Call to Action: Building Partnerships for a Sustainable Future
In conclusion, scaling up nature-based solutions demands a paradigm shift in the way we approach sustainable finance. By leveraging blended finance, innovative financial instruments, and creating enabling conditions, we can drive greater collaboration between public and private actors. However, this can only be achieved if businesses, governments, and civil society work together to build a more sustainable future.
The paper presented by LSE students as part of our ASI Knowledge Exchange Series and titled “Incorporating Nature into Finance: Scaling Up Nature-Based Solutions” provides a valuable roadmap for achieving this goal, and it is now up to us to put these ideas into action. The full report, which offers a more in-depth exploration of these concepts and recommendations, can be downloaded HERE.
Furthermore, Adam Smith International has published a report that delves into the concept of nature-based solutions and provides practical insights – it can be found here.
Let us join forces to recognise the potential of nature-based solutions and chart a new course towards a greener, more resilient future. We can protect our planet for future generations by working together to implement and scale up Nature-based Solutions.