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Insights / Article

18 Nov 2021 / 22 min read

Ensuring Investment in Nature Delivers Benefits for All

As public and private actors develop strategies to deliver on their net zero commitments, nature-based solutions are increasingly seen as part of the solution, yet they are not a silver bullet alone. If investments are to be scaled up to address both climate change and ecosystem degradation, a focus on the integrity of investments must be central.

Birds-eye perspective of the Jurura river in Carauari, in the centre of Amazonas. Florence Goisnard/Getty Images.

Net zero implications for land use

Net zero commitments by both public and private actors are becoming increasingly common. As of November 2021, 135 countries, 111 regions and 230 cities have made net zero pledges.1 These commitments represent 88 per cent of global greenhouse gas emissions, 90 per cent of global GDP and 85 per cent of the global population.2

But delivering on net zero commitments requires some deep changes including a shift away from current approaches to land use.

Currently, the land use sector is responsible for a quarter of net global greenhouse gas emissions.3 The Intergovernmental Panel on Climate Change has mapped pathways consistent with limiting warming to 1.5°C above pre-industrial levels and, in all of these, halting deforestation and shifting away from the most intensive agricultural practices are essential.4

Additionally, land use is among the few activities that can currently provide a technologically feasible carbon sink. Indeed, many carbon-heavy industry players, such as the energy, steel and concrete sectors, alongside a variety of investors, are now looking to the potential of land to sequester carbon.

Nature-based solutions

The concept of nature-based solutions has become increasingly popular among those looking for ways to reach net zero greenhouse gas emissions. While the term itself is not new, coined by the World Bank in 2008, the net zero conversation has breathed new life into the discussion on climate change.5

Different groups have suggested a number of definitions of what counts as nature-based solutions. While these are broadly aligned in scope, and all encompass investments that provide benefits to climate mitigation, adaptation, natural regeneration and sustainable and inclusive social development, no one definition is universally accepted and investments classed as nature-based solutions can look very different from each other.

Nevertheless, scaling-up investments in nature-based solutions can be a timely intervention in the race to reach climate targets and protect the integrity of natural ecosystems.

However, current financial flows to protect and enrich nature are paltry compared to the scale of the challenge and, although hard to quantify precisely, most estimates point to a large financing gap.

In May 2021, the UN Environment Programme reported that approximately $133 billion flows into nature-based solutions each year – with public funding making up 86 per cent of this share.6 Yet to deploy these solutions at sufficient scale in order to deliver net zero objectives and tackle biodiversity decline, this needs to be increased to reach $536 billion annually by 2050.7

Similarly, to reverse trends in biodiversity degradation, the Paulson Institute, The Nature Conservancy and Cornell Atkinson Center for Sustainability estimate that a biodiversity financing gap of $711 billion per year must be bridged.8

Paving the way for investment

Accessing new sources of capital from private actors can help to close this financing gap and, depending on the intervention, investments in nature-based solutions can produce a range of financial returns alongside benefits to environment and society.

To date, though, many investments have been made in a concessionary capital approach whereby investors are more willing to take lower financial returns to maximize social impact. This model is most suited to outcome-oriented actors with less requirements to make a financial return on investments such as sovereign wealth funds, endowments or philanthropists. But angel or seed investors may also look to invest in nature-based ventures with innovative – but currently low-profitability – business models in anticipation that cash flow from these activities may increase.

Yet, accessing the large volumes of finance required from other actors, such as institutional investors, will mean looking beyond concessionary capital or those willing to shoulder high risks. To do so will require connecting the natural and social benefits of forests to new revenue streams that match a range of investor risk-return profiles.

With the promise of these new types of finance for nature on the horizon, it is critical to ensure investments are directed to robust nature-based solutions that maximize additional social and environmental outcomes over, and above, carbon sequestration and that also do not come at the expense of any of the other benefits that ecosystems provide or compromise communities too.

Mobilizing more finance for nature-based solutions is related to previous debates on forest conservation and restoration. The Global Partnership on Forest Land Restoration9 launched in 2003, and spearheaded by the International Union and Conservation of Nature and others, first put restoration on the global agenda.

Then, in 2005, the COP11 Climate Summit introduced discussions on the REDD (Reducing Emissions from Deforestation and Forest Degradation in Developing Countries) programme followed by REDD+ in 2007 with the objective of mitigating climate change by reducing net greenhouse gases emissions through enhanced forest management in developing countries.10

This collective action subsequently gained more traction with the Bonn Challenge in 2011, which aimed to restore 150 million hectares of degraded and deforested landscapes by 2020 and 350 million hectares by 2030,11 as well as the launch of the New York Declaration on Forests in 2014.12

Over the last two years, more business-focused organizations, such as the World Economic Forum13 and World Business Council for Sustainable Development, have also joined the trend.14

Finally, following the signing of the Paris Agreement in 2015, more public institutions have taken measures to scale up investments in nature-based solutions according to measurable targets.

Indeed, when submitting Nationally Determined Contributions (NDCs) following the Paris Agreement, over 66 per cent of signatories made reference to nature-based solutions in various forms, including reforestation and conservation.15 In fact, in the second week of COP26 this year, over 92 per cent of all updated NDCs mentioned the role of nature in delivering on emissions reduction pledges.16

Private sector commitments to invest in natural ecosystems have also recently snowballed. In January 2020, Microsoft announced the release of its Climate Innovation Fund, worth $1 billion, which would be invested in solutions required to make the corporation net zero by 2030.17

Five months later, Amazon released its Climate Pledge Fund ($2 billion)18 and Unilever its Climate & Nature Fund ($1 billion) while,19 in August 2020, HSBC launched its Natural Capital Fund worth $1 billion.20

Integrity of investment is critical

The institutional willpower, as well as the finance available, to invest in nature-based solutions has increased across the board. Within this band of potential investors – and champions – private finance actors represent a relatively new face at the table. But, as mainstream investors take tentative but definite steps to diversify their portfolios into nature-based solutions, care must be taken to ensure that financial support is channeled to robust projects. This means embedding considerations of sectoral decarbonization actions, alignment of standards and assuring project quality and wide-reaching benefits.

In addition, it is crucial that nature-based solutions cannot provide an unlimited volume of carbon sequestration. They need to form part of the wider societal transition away from fossil fuels. Even in regions where these solutions hold most potential, the estimated carbon sequestration they can deliver is only up to 48 per cent of current national emissions in tropical countries.2122

Investments designed to permanently store carbon must meet two conditions:23

  • Carbon offsets should not be a tool to balance additional emissions but must be commensurate with an operational supply chain-wide decarbonization process for organizations that invest in them.
  • Care should be taken to audit carbon sequestration projects, such that the stored emissions are permanently locked into the biosphere, and do not cause a leakage of emissions elsewhere and are also not ‘double counted’ when attributing which actors can claim the credit for.

A social licence to operate for investors in a sector with poorly defined parameters can give space to greenwashing across the financial community and enable the proliferation of poor-quality projects.

Creating better alignment in terminology and standards for nature-based solutions, therefore, can help to define parameters for what good practice looks like, drive capital to projects that deliver demonstrable benefits and enable greater accountability of those that do not.

Investments in nature-based solutions should importantly enhance long-term benefits for local communities and the environment too. The social and environmental benefits can range from increased resilience through adaptation, provision of sustainable resource management for food and water and the nurturing of biodiverse landscapes. Limiting the discussion to projects’ carbon mitigation potential can sideline other benefits.

On July 26, International Mangrove Day, a volunteer helps to cultivate newly grown mangrove trees on Teluk Palu Beach, Central Sulawesi, Indonesia. Basri Marzuki/Getty Images.

Equally, if nature-based projects that are poorly managed or have little understanding of the local environmental, social or political contexts, can lead to negative outcomes, such as the displacement of people or the loss of their rights to local land and resources.24

To help avoid these negative outcomes occurring, space must be made to place those with expertise in the technical, landscape, political and social contexts of where and how investments are made at the centre of investment discussions.

Increasing investor knowledge

By sharing knowledge on how to design projects that deliver material benefits to communities and ecosystems, finance can be channeled to more robust activities. Fortunately, a wealth of knowledge already exists among groups and communities who are already actively stewarding nature.

Partnerships between conservation groups and mainstream banks and corporates, for example, are increasingly a vehicle to move finance to nature-based solutions.

In April 2021, Apple and Goldman Sachs announced the co-development of an initiative worth $200 million to invest in forestry projects to remove carbon from the atmosphere in partnership with US non-profit organization Conservation International.25

In August 2021, HSBC similarly announced they are partnering with climate change investment and advisory firm Pollination to create Climate Asset Management,26 while in September 2021, BTG Pactual Timberland Investment Group (TIG) and The Nature Conservancy announced they would join forces on projects in the United States worth over $850 million.27

Many mainstream financial institutions are also seeking to embed expert knowledge on how to finance forest landscape projects internally. One strategy to internalize expertise is the acquisition and growth of forest finance vehicles. In June 2021, for example, JP Morgan bought the forest management group Campbell Global in a deal worth $5.3 billion.28 This acquisition will see the integration of more than 1.7 million acres of forested landscape into JP Morgan’s portfolio.

The creation of dedicated roles for forest investment experts within finance organizations is another strategy to build institutional understanding of nature-based solutions.

Initiatives to share knowledge on nature-based solutions should also seek to widen the lens of who is considered to have expertise at the decision-making table. Experience of developing business models that deliver additional environmental benefits for nature-based ventures is only one facet of expert knowledge. Equally as important is local or indigenous knowledge that understands the nuanced political and social context of landscapes and can anticipate the potential negative outcomes of projects before they arise.29

Moving forward

Following COP26 this year, attention is shifting from commitments to net zero towards the question of how it can be achieved.30

Recent trends suggest that nature-based solutions are increasingly on the radar of both public and private institutions as one part of this.

The next step will be to transform this momentum into the movement of capital into nature-based activities that deliver the greatest environmental and societal benefits.

But, if mobilizing capital to nature is to be scaled-up, it will be necessary to find ways to de-risk nature-based solutions and normalize these investments to new actors in the private sector.

This will involve increasing investor confidence that these solutions can deliver both viable financial returns and maximized social and environmental benefits.

Embedding knowledge within financial organizations is one way to increase confidence, however, to deliver nature-based solutions that maximize wider-benefits at scale, supportive public policies that increase the monetary value of essential forest services for nature and people will be needed to provide the reliability of returns and outcomes investors are looking for.