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13 April 2023

Nature-based solutions: Can plants come with profit?

Reporter at Uxolo
Climate finance
Nature-based solutions are one of the world’s most powerful tools for capturing and storing carbon, protecting coastlines, reducing rising temperatures, and safeguarding populations. But investment into this nascent sector is embryonic and faces a litany of challenges.

Public and private investment is pursuing a net zero emissions future primarily through means of nature-derived solutions – for example, wind farms, solar PV plants and carbon capture technologies. But there is a growing demand for more attention to be paid to the silent ecological warrior of carbon emissions reductions – nature-based solutions (NbS).

Some of the best examples of NbS are mangroves and green spaces, which provide effective climate change adaptation and disaster risk reduction for coastal and urban resilience. According to an International Union for Conservation of Nature (IUCN) report, mangroves provide over $65 billion in flood protection, safeguard 15 million people against flooding per annum, and act as one of the most effective per unit area carbon sinks currently known. Similarly, green spaces absorb storm water run-offs, reduce urban heat-island effect, and lower drought impacts and remove carbon emissions.

Comparable manmade carbon capture technologies do not exist in most geographies, says IPCC analysis, at commercial scale or reasonable cost.

But these solutions are not watertight, with warnings that without deep emissions cuts and unprecedented conservation and restoration action, ecosystems may struggle to withstand even smaller increases in emissions. And another challenge pointed out by some market commentators, like Chausson et al. (2023), is the compatibility of market-based mechanisms for driving investment into NbS.

In short, the potential for scaling NbS solely through natural capital markets is confined to landscapes where these schemes are cost-effective for investors – and that poses an issue. According to the article, quantifying and mapping ecosystem flows remains difficult and prone to error, and ecosystem service valuation, though improving, is limited by a bias towards available data that is instrumental, tangible and easily measurable. This issue also continues to restrain biocredit schemes, tradeable credits based on biodiversity.

And for mechanisms like green bonds, NbS’ scattered, small-scale nature can conflict with the nature of private investment portfolios. DFC’s Jamie Cashman told Uxolo much the same in 2021, “The projects don’t lend themselves to any kind of cookie-cutter approach, and so that means that each investment involved has to be tailor-made for the very specific local conditions.”

Carbon-focused NbS

Forestry, agriculture, and water NbS hold sway as the only sectors commercially mature enough to attract private investors. The ability to monetise progress around a single metric, carbon, is a significant advantage. The forestry sector is further strengthened by the emergence of more “stable and predictable” voluntary carbon markets (VCMs) – the drive to generate credible, high-quality carbon credits is partly being supported by reforestation-focused solutions.

But even in forestry, there is much work to be done. As much as 80% of potential implementation opportunities for NbS in tropical forest regions are currently not financially viable, in terms of return on investment, through a purely market-based approach (e.g, VCMs) when considering the costs of implementation, management, and monitoring.

Beyond carbon credits, cloud forest bonds are a new instrument attracting investor attention. More than half of the 980 hydropower dams currently in operation in 25 countries are dependent on water generated by cloud forests, which, according to Earth Security, represents over $118 billion over a ten-year period. The NGO recommends bonds could be designed as new issuances, debt-swaps, or results-based financing instruments to match the circumstances of the respective countries.

 The Uxolo perspective

The NbS sector is fledgling – the United Nations’ recent State of Finance for Nature report evaluated the current size of the market at $154 billion a year, with the private sector contributing only 17% of investment flows. Private capital is unlikely to flow in huge amounts to a novel asset class that lacks well-known, standardised products and instruments.

Actors are making clear that the sector’s growth should be proactively managed to ensure commodifying and monetising nature is done appropriately. Poor governance and transparency could risk harming indigenous peoples, local communities and biodiversity conservation efforts. According to a WWF survey of finance sector representatives, the high reputational risk posed by the potential negative impacts of NbS was a critical issue preventing wholesale movements by investors.

And the other question is: can cultivation ever come alongside commerce, plants with profit? Unlikely. Especially given investors lack of willingness to accept a lower return on investment. Shouldering such an approach is very much the antithesis to the capitalist mantra of the post-industrial revolution – but adopting a more holistic and effective way of harnessing nature to combat climate change will be paramount to realising the race to net zero emissions by 2050.

Blended finance will be a key steppingstone for the sector, especially due to the high upfront costs, long development lead times, and thorough due diligence requirements that NbS projects require in appropriately mapping out ecosystems. These requirements mean that economic value may be difficult to capture over a shorter-term investment horizon, so DFI and MDB technical assistance, guarantees, and insurance will play an essential role in mitigating upfront risk and getting such projects across the financial line.

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