Making nature attractive to investors

Harnessing the power of nature to tackle today’s biggest challenges – from environmental degradation to poverty – sounds like an obvious opportunity. Nature-based Solutions (NbS) have the potential to address multiple issues at once. So, why isn’t NbS gaining traction? As usual, it boils down to money. To scale NbS, you need public and private investments. And here the trout starts swimming upstream: how do we quantify a solution – which requires time and maintenance to materialise – to investors?

Traditional infrastructure projects, such as building a seawall for flood protection, have clear financial returns. The benefits of NbS, while much wider in scope, usually only emerge over time. Instead of building a wall, you could plant a mangrove forest. While mangroves reduce wave height and erosion, the economic value extends beyond this. These forests act as natural filters, improving water quality and creating nursery habitats for fish, increasing fish stocks. Mangroves can also boost tourism thanks to their scenic beauty. 

However, quantifying the total economic impact of the interconnected benefits is complex and requires long-term monitoring. This makes direct cost-benefit analysis challenging, preventing investors from recognising the financial viability of NbS.

To address this, standardised metrics that capture the economic, social, and environmental benefits are crucial. These metrics would enable an accurate comparison with traditional solutions.

YAPU Solutions, an Ecuadorian company, has integrated NbS assessments into its agricultural investment evaluation process. By analysing factors such as climate sensitivity, adaptive capacity, climate exposure, and biodiversity conservation, the company provides financial institutions with comprehensive insights into NbS benefits. These assessments combined with traditional financial metrics empower informed decision making in the agricultural sector.

Another hurdle is the perceived risk. Investors might be concerned about a new forest taking years to mature or a restored wetland needing ongoing maintenance. To mitigate this, financial derisking mechanisms such as guarantees can be implemented.

For example, a private firm funded the Cascades Forest Project in Oregon State in the USA, but with a twist. The Bonneville Environmental Foundation (BEF) offered a performance guarantee. This means BEF would compensate the investor if the project failed to meet its environmental goals, such as a specific level of carbon sequestration or biodiversity restoration. The performance guarantee functions for all intents and purposes as insurance.

Public-private partnerships (PPPs) offer another avenue, where government and companies can share the risk and responsibility. Governments and philanthropic funds can provide the seed funding to get NBS projects off the ground and once they show financial benefits larger private companies join in. Governments subsidised solar for years although the industry was making a loss. Today, many large corporations occupy this space.

Innovative financial instruments such as carbon and biodiversity credits, debt-for-nature swaps, and green bonds can incentivise large-scale private sector investment. These instruments are still perceived as niche products only available to sustainability-minded companies or investors. Accessibility is a challenge. Interested institutional investors must work hard to find these instruments. Carbon credits are usually traded only in specialised markets like the European Climate Exchange and only select governments will issue green bonds.

It should be noted that although slow, these products are gaining traction, even in South Africa where the Johannesburg Stock Exchange launched the Sustainability Segment, which enables companies to raise debt for green, social and sustainable initiatives. Rand Merchant Bank is also looking to launch wildlife bonds to help lions and wild dogs.