How to finance nature-based solutions to climate change
A doubling of finance flows into nature-based solutions is needed by 2025 to tackle the climate and biodiversity crises, so what can potential investors learn from three successful case studies?
The inclusion of the phrase “nature-based solutions” to climate change for the first time in a COP text at Sharm el Sheikh shows the growing awareness of the links between the climate crisis and the biodiversity crisis, and the need to tackle both crises together.
Nature-based solutions to climate change are a collection of approaches that support climate adaptation and/or mitigation, while also having a positive impact on biodiversity.
They include: avoiding emissions through protecting landscapes to limit deforestation; restoring ecosystems, such as drained peatlands, so they sequester carbon and improve degraded habitats; improving management practices of farmed land such that emissions are reduced and sequestration maximised; allowing waterways to meander to reduce flood risk; and better integrating nature into urban areas and agricultural landscapes.
Finance options for nature-based projects tend to vary: from purely public, to public-private partnerships, to blended finance (in which the public segment typically takes first loss), to purely private.
However, to deliver the scale needed to tackle the climate and the biodiversity crises, studies indicate that the private sector needs to play a much bigger role. For example, a recent UN report revealed that climate, biodiversity and land degradation goals will be out of reach unless nature-based solutions quickly ramp up to $384bn per year by 2025, more than double the current $154bn per year. Private capital currently only represents 17% of total investments.
“There’s a lot of talk about net-zero targets, but the overall goal should be to create a liveable planet,” says Karin van Dijk, biodiversity fund manager at ASN Impact Investors. “Biodiversity is inseparable from climate so, in order to address climate change with our investments, we must also focus on protecting and restoring biodiversity. Nature-based solutions represent an integrated approach to achieving this.”
Reforestation and regenerative agriculture: SLM Silva Europe Fund
The commonest form of nature-based solutions to climate change are reforestation and regenerative agriculture projects, according to WWF. Such projects aim to protect existing carbon sinks and change how land is used in a way that reduces carbon emissions and promotes biodiversity.
More than just planting trees, reforestation projections entail both an intimate knowledge of the relevant ecosystems and involvement of local communities.
“Land management and reforestation projects are the cheapest, most scalable and most widely used means of tackling the climate crisis via nature-based solutions,” says Alison Midgely, a sustainable finance expert at WWF.
“The majority of investable projects related to the net-zero space tend to focus on carbon credits and carbon trading platforms, but such projects have serious risks, as the recent Verra scandal demonstrates. Well-governed nature-based solutions offer a more holistic approach.”
In emerging markets, Midgely continues, some of the biggest risks come from illegal logging, which do not necessarily imply a failure of due diligence, but the consequence of activities that are difficult to manage in certain parts of the world. The advantage of nature-based solutions is that they actively seek to manage the social conflicts typically by ensuring that local communities have a vested interest in the success of the project.
“You cannot protect and restore nature without local communities,” says van Dijk. “If people don't have an income to provide for food or housing for their families, or education for their children, it's really hard for them to protect nature and wildlife. There may be no alternative for an income apart from deforesting land for agriculture, poaching or illegal logging. That’s why it’s critical to establish a business model that integrates a sustainable income for local communities.”
One of the ASN biodiversity fund KPIs is the amount of jobs sustained or created by its investments.
A good example of a project that also generates returns for investors is the SLM Silva Europe Fund, whose mission is to use capital to scale up regenerative, resilient and economically competitive farming and forestry systems. By investing directly in land and changing management practices, SLM Partners creates systems that grow food and materials profitably, while rebuilding soils, preserving water, restoring biodiversity and absorbing carbon from the air.
These systems can also generate better risk-adjusted economic returns because they are less exposed to volatile input costs (such as synthetic fertilisers), more resilient to a changing climate and can tap into a higher-value market, namely organic labels.
“They truly believe that they can only achieve a sustainable financial return by enhancing the natural capital,” says van Dijk.
The SLM Silva Europe Fund targets market-rate returns, driven by income from the sale of commodities (nuts, olives, timber and cork) and capital appreciation of the land and its biological assets over ten years. The fund has also formalised impact targets for carbon, soil, biodiversity, water and society, and set aside 10% of the land for the restoration and conversation of biodiversity.
Of the more than 40,000 listed companies worldwide, only a handful do not have a negative impact on climate or biodiversity, ASN Impact Investors has found. To achieve maximum impact, investment needs to be channelled into typically smaller companies that have embraced sustainable economic principles in an integrated fashion. This is the reason why ASN Impact Investors started to invest in unlisted funds, such as the SLM Silva Europe Fund, which are able to invest in local projects.
“The market is quite new, but investment at this early stage could help them scale up,” says van Dijk. In addition to the SLM Silva Europe Fund, there are a wealth of projects suitable for investment; currently ASN Impact Investors has more projects than funding, which enables it to adopt a selective approach.
Unfortunately, larger institutional investors tend to shy away from such projects for two main reasons. Firstly, it is often difficult to quantify the impact of the projects due to a lack of a common methodology and the site-specific nature of biodiversity. Secondly, there is often a mismatch between the return of the project and the risk appetite of the investor. One solution to this problem is a blended finance arrangement in which a government and/or development bank either provides a grant or agrees to cover first loss. This is particularly useful for funding projects in emerging markets, where risks tend to be higher and returns lower.
ASN Impact Investors has already taken advantage of many such arrangements; this is key, since its fund is composed mostly of retail investors who require an extra level of protection. Since the SLM Silva Europe Fund is focusing on scalable and larger projects in Europe, where risks are lower, that particular investment did not require a blended finance approach.
“What differentiates a nature-based solution from tree planting is the structure and the due diligence around the project,” says Midgely. “We can’t replant the Amazon elsewhere and carry on deforesting. A good nature-based solution is not just a tradable credit; it operates at the local, landscape level and looks to benefit both the people and the ecosystem services on which the people depend.”
Mangroves restoration in Indonesia
Successful mangroves restoration projects are an efficient way of both protecting coastlines from rising sea levels and removing carbon from the atmosphere.
“What makes mangroves incredibly efficient at carbon sequestration is the ecosystems that they maintain,” says Henk Nieboer, director of Ecoshape, a network of organisations and individuals that has played a key role in mangroves restoration in Demak, Indonesia.
“There are various species of animal that take organic materials and store them under the water table to have food when there is less to eat. However, the majority of this material is forgotten about, meaning the organic material is compressed and pushed deeper into the water. This also raises the level of the coastline, protecting it against rising sea levels.”
However, mangroves restoration is high risk, due to the extreme sensitivity of the trees, and only 15-20% of restoration projects have been successful to date, according to Wetlands International. “The main point is that mangroves restoration is not only about planting mangroves, but creating the right conditions under which mangroves thrive,” Nieboer says.
Those conditions include ensuring just the right amount of fresh water is available to the mangroves.
“When we first started our programme in Indonesia, our main objective was to stabilise the coast,” Nieboer adds. “Between 2003 and 2013, the coast had retreated by more than one kilometre due to erosion.”
In Indonesia alone, there are thousands of kilometres of suitable coastline on which the project could be replicated. However, the devil is in the detail of finding suitable finance arrangements and getting local communities involved, as well as other institutional and political issues.
Although the Demak project is financed principally by public money and sponsorship, there are possibilities for other kinds of investor to get involved. Ecoshape has calculated that $5m of investment in a successful project could yield $120m of carbon credits alone (net value between 2023 and 2100), to say nothing of the benefits to biodiversity.
“I truly believe that nature-based solutions such as mangroves restoration could be a breakthrough in addressing the climate crisis,” says Piet Dircke, global solutions director for climate adaptation at Arcadis, a company that specialises in sustainable solutions. “It could attract energy firms in transition and investors with net-zero transition plans, as well as developed world governments.”
Climate justice groups have long made it clear that the developing world should not have to pay for climate adaptation, since the majority of emissions come from the developed world. Mangroves restoration is an opportunity to support both climate adaptation and mitigation simultaneously.
Another challenge is getting local communities involved. “When we commit to mangrove rehabilitation activities, right from the start we need to understand the purpose of this area in the future,” says Apri Astra, programme coordinator for coasts and deltas, at Wetlands international, which worked alongside Ecoshape in the Demak project.
“It’s no good if, for example, in five- or ten-years’ time the area gets earmarked for urban development. As mangroves were originally destroyed by human activity, we need to ensure that the local communities are aware of the benefits of its restoration and have a vested interest in the success of the project.”
Awareness levels tends to vary from place to place along the coastline. In the best-case scenario, local communities become de facto field agents, reporting back to the NGO project managers, who cannot be everywhere at once, with progress reports.
Innovative coastal defence systems in the Netherlands
A famous example of a nature-based solution happened 12 years ago, when the Dutch government, private sector stakeholders, and a variety of research institutions and universities tasked themselves with developing new nature-based methods to protect the vulnerable Dutch coastline from rising sea levels. Instead of simply raising the dykes, or putting up concrete flood walls, they wanted to use the forces of nature, of sand, sedimentation, wind, and water, in a cost-effective and dynamic way that would also restore the coastal ecosystem. They called the public-private initiative “Building with Nature”.
One important result was a multifunctional coastal project that combined civil engineering with nature-based solutions: a hybrid of sand dunes and underground concrete dykes. “The underground dyke doesn’t affect the outside environment, but is there for strength and emergency purposes,” says Dircke, who was involved in the project. “If coastal flood defences fail, the western part of Netherlands would go under water, affecting up to four million people.”
One of the underground dykes even has a car park, and is, to Dircke’s knowledge, the only dyke in the world that makes money and is a testament to the “multi-functional” spirit of nature-based solutions, which should also have a positive social and economic impact. The sand dunes increase the attractiveness of the region, improving the quality of life for locals, while the underground car park relieves pressure on the transport infrastructure.
Now Arcadis is working on a similar project in New York City, the East Side Coastal Resilience project in Lower Manhattan. Like the Dutch project, a key challenge is understanding the trade-off between the carbon-intensive civil engineering elements and the nature-based solution elements. “The New York project is right next to a highway, which leaves little room for a completely nature-based solution,” Dircke adds.
Unlike the other two case studies, the Dutch coastline defence project was entirely publicly funded. However, it serves as a useful example for the innovative thinking that ought to accompany nature-based solutions.