Investing in Nature-based Solutions Reduces Long-term Risk
As COP16 highlights financing gaps, initiatives help to overcome private sector struggles to identify and fund nature-positive projects.
Nature-based solutions (NbS) may need more private investment to make a positive impact on climate and biodiversity – but they can also help the private sector shield itself from risks and build long-term value.
This was one of the takeaways from a World Resources Institute (WRI) event held during COP16, in which panellists discussed ways to crowd-in more private funding to NbS – a crucial contribution to plug the US$200 billion annual shortfall in financing for nature.
“There is growing interest from financial institutions in NbS investing, but [they] can also transform the operations of companies, helping to reduce the main drivers of loss and support projects that contribute to Global Biodiversity Framework (GBF) targets,” said Natacha Boric, Head of Policy and Positive Impact at the Finance for Biodiversity Foundation. “Integrating NbS into operations can reduce costs and long-term risks. If you can demonstrate that to financial institutions, you have a recipe for attractiveness.”
NbS are expected to play a critical role in temperature stabilisation and greenhouse gas emissions reduction from agriculture and land use this century, according to Inevitable Policy Response (IPR) – a climate transition forecasting consortium commissioned by the Principles for Responsible Investment. Its latest policy scenario forecast that NbS such as sustainable agriculture, ending deforestation and land conversion could help reduce global emissions to 11.6 gigatonnes of CO2 equivalent (GtCO2e) by 2050, down 77% on current levels.
IPR currently estimates that US$1.6 trillion of investments in NbS will be needed globally by 2050 to stabilise climate and nature. The UN broadly defines NbS as “actions to protect, conserve, restore, sustainably use and manage natural or modified terrestrial, freshwater, coastal and marine ecosystems”.
Critical contributor
Nature depletion is increasingly being recognised as a significant economic and financial risk as well as an ecological one, panellists observed.
“Roughly 50% of the global economy depends on nature, and if vital landscapes and ecosystems collapse, 51 countries will lose 10-20% of their GDP this decade,” said Helen Ding, Senior Economist at the WRI. “Nature is also a critical contributor to companies’ net zero targets. More than half of the world’s 2,000 largest companies have already committed to net zero – but without nature, achieving this is impossible.”
Yet, funding for nature restoration and protection is lagging behind. Realising climate benefits from NbS will require a significant uplift in investment, and soon, IPR warned – estimating that US$36 billion will be needed annually by 2030, and US$75 billion by 2050.
“While these investment levels appear more modest relative to the energy sector, attaining [them] will require concerted policy and capital mobilisation particularly given competing land uses for agriculture, development and infrastructure,” IPR said. “The replicability, scalability and near-term impact of existing instruments to scale NbS, including compliance and voluntary markets, remain uncertain. It is critical that other mechanisms be activated over the next five years.”
Ahead of COP16, joint analysis by Carbon Brief and The Guardian showed that 85% of countries were set to miss a UN deadline to submit new nature pledges – known as National Biodiversity Strategies and Action Plans.
Risks and opportunities
Ding acknowledged that several obstacles stood in the way of increased private sector contributions to NbS. Namely, many projects do not meet investor expectations, with risk/return ratios often unattractive due to small deal sizes, limited revenue streams, and long payback periods.
“On the other hand, companies are facing a lot of challenges when trying to identify a very clear business case for investing in nature, which also affect their ability to secure financing for projects and justify initial investment,” Ding added. “For investors in listed companies, it’s also very challenging to see how investing in NbS can translate into tangible shareholder value.”
Notwithstanding these hurdles, NbS represent substantial opportunities, which investors should seize on. According to Ding, agroforestry will move from representing ‘low billions’ today to up to US$100 billion over the next five years, and sustainable forest management to US$500 billion. “Private sector players should collaborate to overcome those challenges and capitalise on some really interesting growing opportunities to scale up investments,” Ding argued.
Although funding delays could jeopardise nearer-term objectives, substantial scaling efforts into the 2030s would help close the finance gap, according to IPR.
“COP29 negotiations on a New Collective Quantified Goal for climate finance could create a robust framework to support scaling of NbS worldwide – capturing both public and private initiatives,” IPR said. “Ambitious financial targets will demonstrate seriousness of international commitment, in turn encouraging countries with significant potential to prioritise NbS in their policies, strategies and budgets.”
Crowding in private investment
A number of initiatives are in place to stimulate private sector contributions to NbS. One of them is the LEAF Coalition, which aims to halt deforestation through large-scale tropical forest protection, combining support from governments and companies.
“We catalyse a new market for jurisdictional REDD+ forest carbon credits by aggregating demand from private-sector players with sovereign donors that have been working to establish programmes at national or sub-national scale,” said Edwina McKechnie, Executive Vice President of Corporate Engagement at LEAF.
“That means we have an actor that can do what only governments can do: set policy incentives, work across stakeholder and industries, enforce regulations around land-use management – and do that in collaboration with local peoples, Indigenous peoples and communities, to try and change incentives on the ground, develop new economic pathways, and importantly – generate emissions reductions credits.”
Jamey Mulligan, Head of Carbon Neutralisation Science and Strategy at Amazon – which helped co-found LEAF – argued that although high-quality projects do exist, they aren’t connected to a ‘theory of change’ that will halt deforestation across landscapes.
“You have to change the political economy around land use if you’re going to halt deforestation, and work through governments to leverage public sector mechanisms,” he said. “The carbon market has a spotty history of creating high-quality projects – but it’s not always going to be a project. We need high-quality solutions.”
Progress on the development of high-quality nature investments is expected at COP16, including via the release this week of high-level principles for the integrity and governance of the biodiversity credit market.
Early movers
Bank of America (BoA) has joined the Nature Climate Solutions Investment Accelerator, through which it has invested in NbS such as peatland restoration in Indonesia and soil carbon sequestration in the US.
“Like the LEAF Coalition, we’ve tried to be part of some ‘first-mover’ efforts to try and build the demand side,” said Abyd Karmali, Managing Director for ESG and Sustainable Finance at BoA. “It’s about giving security to those who are working on project development that the demand side will be there if the projects come to market.”
Meanwhile, the World Wide Fund for Nature (WWF) UK has joined efforts with HSBC and the WRI to develop a philanthropic collaboration aiming to scale up NbS.
“We are particularly focused on unlocking the barriers to resourcing projects that are suited to private finance, helping to bridge the skills gap,” said Claire Cockett, Head of Nature-based Solutions at WWF UK. “The big obstacle at the moment is to [match] the aspirations of companies [with those of] financial institutions to invest in NbS. It’s never a one-size-fits-all approach: we have to flex according to different interests and skill gaps.”
In addition, the WRI is developing a guidebook for businesses on NbS. So far, it has identified five factors – internal and external – to help materialise corporate ambition and implement NbS strategies.
“Three external factors are putting pressures on companies to do more: policies and regulations, which are increasing in scope and ambition; reputational risk and competition; and investor demand, with investors increasingly aware of the GBF and other sustainability reporting requirements,” said Esther Choi, Private Climate Sector Research Lead at the WRI. “[There are also] two internal factors: having strong leadership, [and] securing internal buy-in – ensuring that the strategy and KPIs are aligned with the vision set by leadership.”
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