Nature-Based Solutions in Latin America and the Caribbean: Financing Mechanisms for Replication
This paper aims to connect unmet nature-based solutions (NBS) investment needs in Latin America and the Caribbean (LAC) with new financial resources. It highlights five strategies that leverage private capital to finance NBS, including green bonds, land-based financing strategies, blended market-rate and concessional loans, insurance policies, and endowments.
The Latin America and the Caribbean (LAC) region is grappling with pandemic-related recessions, severe economic and social impacts from climate change, and inadequate and outdated infrastructure. LAC’s infrastructure needs are estimated to be between $179 billion and $313 billion annually. Nature-based solutions (NBS) offer a cost-effective pathway to drive inclusive economic growth, buffer communities against the impacts of climate change, and increase the resilience of LAC’s infrastructure investments.
NBS face a significant investment gap — public and philanthropic sources alone do not meet the need. To fully realize the potential of NBS, the private sector will need to contribute financially. Fortunately, the pool of green finance, private sector funds earmarked for environmental and climate-related investments, is rapidly growing. New financing models can leverage these traditional funding sources with the growing financial commitments for nature from the private sector, unlocking billions of dollars earmarked for green investments.
To adopt these strategies and support investment in NBS, LAC will need new partnerships to build relationships among diverse actors, additional science and proof of concept, stronger governance and more capacity, dedicated and consistent funding streams, and more robust policies that prioritize NBS.
There are four key recommendations to bridge the divide between finance and nature:
1) Incorporate NBS into planning and policies to make the identification of high-value and feasible NBS a routine part of the infrastructure project preparation process, thereby creating a pipeline of investment-ready NBS projects.
2) Incorporate NBS into traditional infrastructure investment models, like green bonds and land-based financing mechanisms. Given concerns about the performance and economic return profile of NBS, incorporating NBS into traditional financing pathways alongside gray infrastructure (green-gray approach) can meet the minimum investment thresholds, lower transaction costs through project aggregation, and increase investor acceptance and familiarity with NBS.
3) Demonstrate performance metrics and proof of concept. Both NBS project developers and investors express a desire for greater clarity correlating the size of investment to financial, environmental, and social impacts. NBS performance is inherently complex and uncertain, as it depends on varying environmental, social, and climate conditions (Browder et al. 2019), and takes years of data collection to assess. Ongoing performance monitoring and evaluations are needed to verify that expectations are met and provide proof of concept to investors. Funders for NBS should prioritize performance metrics by providing capital up front and promoting public disclosure of findings to further advance understanding of the benefits of NBS.
4) Increase monetization of NBS. Monetizing the value of NBS co-benefits, such as capturing the additionality of carbon sequestration through the carbon offset market and/or selling timber products through the forest product market, can provide additional revenue streams to support the financial (and commercial) viability of NBS.
Key Findings:
- Nature-based solutions (NBS), which enhance, restore, and protect natural ecosystems, can contribute to sustainable economic growth and inclusive development, and can buffer society against the impacts of climate change.
- NBS can provide a multitude of benefits: they can save money, generate attractive returns for investors, increase resilience and protection of communities and infrastructure, and enhance natural capital assets.
- Despite these benefits, NBS face a significant investment gap. Public and philanthropic sources alone do not meet the need. Consequently, NBS are not achieving their full potential.
- New financing models can leverage these traditional funding sources with the growing financial commitments for nature from the private sector, unlocking billions of dollars earmarked for green investments.
- This report aims to connect unmet NBS investment needs in Latin America and the Caribbean (LAC) with new financial resources. It highlights five strategies that leverage private capital to finance NBS. These include green bonds, land-based financing strategies, blended market-rate and concessional loans, insurance policies, and endowments.
- To adopt these strategies and support investment in NBS, LAC will need new partnerships to build relationships among diverse actors, additional science and proof of concept, stronger governance and more capacity, dedicated and consistent funding streams, and more robust policies that prioritize NBS.
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