An Investor Framework for Nature-based Solutions

Type of forest intervention is the forestry activity that is funded on the ground. Different types of activity will generate different commodities or provide different ecosystem services – each with their own unique revenue streams.

The scale and scope of the investment is a measure of the total tangible or intangible output. For example, a larger commodities-based project will be able to bring more end-product to market. Care must be taken when considering the scale to understand how this affects the provision of all forest services.

Cash flow incorporates the duration, timing, amount and regularity of different streams of return from the investments.

Landscape stakeholders are communities and groups that would be affected by an investment within their local landscape. The legal ownership status of the land will affect what type of forestry activity can be funded. Beyond legal requirements, efforts should be made to understand how forest projects will affect local communities.

Infrastructure relates to the availability to store, process and transport products to market. Established infrastructure means additional investments in the supply chain will not have to be made thereby increasing returns. Little or poorly conditioned infrastructure will increase the costs of bringing commodities to market or measuring service provision.

Landscape condition is the physical state of the land at the point of investment. This affects the upfront investment required to transform the land to a given type of forest activity.

Physical risk refers to the effects of extreme weather events, including fires and drought, and long-term climate shifts. The atmospheric and land conditions will affect the growth and health of the nature-based solution. As investments are usually made over a long period, the long-term shifts in climate and the effects of extreme weather should be extrapolated to account for future conditions.

Biological risk is the potential for disease, fungi and pests to affect the health of the biological agent being utilized as part of the nature-based solution. Poorly managed biological risk can result in degradation or loss of elements of natural ecosystems. Future trends in biological risk should be calculated to account for changing climates.

Social risk incorporates the risk to the investment from poorly planned social management, competing land claims, unsettled land tenure or other social issues or conflicts in the region which may or may not be directly related to the investment activity.

Voluntary standards are those that project managers are not obliged to follow but are normalized to ensure project best practice. These provide a benchmark for investors to ensure they are financing best-in-class projects. In the absence of independent standards, investors must rely on their own due diligence, monitoring and definitions of best practices which may increase complexity and reputational risk.

Mandatory land-use policies are those that relate to land ownership or activities that can be conducted on the land. These policies may incentivize certain types of land-use or land management practices.

Landscapes can provide a range of ecosystem services such as carbon sequestration, water quality and quantity, wildlife habitat, biodiversity and recreational amenities among others. In some cases, downstream water users, recreationists or other users of such services will compensate landowners for their provision.

Many of the environmental benefits of nature-based solutions may be quantifiable but difficult to standardize and generate a cash-flow from. In many cases, measurement and monitoring can be costly. Measurable indicators can, however, increase performance in financial reporting and ensure that ecosystem services are in fact being delivered.

While not all environmental benefits have a direct financial impact, they are still an important aspect that investors should consider. Poorly managed ecosystem services, not only provide a reputational risk to investors, but run the risk of future legal liability. As measurability and business models develop, these as-yet unmeasurable opportunities could become more material in the future thereby driving new types of cash-flows.

The social outcomes of investing in nature-based solutions can provide a new stream of revenue.

Many social benefits do not explicitly provide cash-flows but are indicators that the project is delivering positive impacts for society. Some of these can be measured. These reduce the reputational risk of investment, can be reflected in expanded reporting and offer potential for future revenue streams.

Many social benefits are difficult to fully capture in traditional quantitative measurement techniques. They are, however, important to ensure that projects deliver benefits to local communities and can help investors reduce reputational or social risk.

Governance and ownership can provide new forms of cash-flow for an expanded group of stakeholders.

Good governance can give nature-based projects security over the period of the investment and ensure that benefits are being shared with all affected stakeholders. Many indicators of good governance are measurable.

Some examples of good governance can be tricky to quantify or measure meaningfully. Efforts should be made to ensure that proactive actions are taken to reduce the risk of poor governance.

These are the emerging policies that will explicitly target nature-based activities and investments. They could affect supply of capital, investor behaviour, market end-demand and certainty of cash-flow. Uncertainty in whether these policies will be put in place over the time-horizon of an investment can discourage investment.