Pathways to Unblocking Private Financing for Nature-based Solutions
Implementing Nature-Based Solutions (NbS) can be an impactful strategy to confront biodiversity and climate crises, while promoting sustainable rural development and generating financial, social and investment returns. Despite this, NbS face multiple difficulties in implementation, with lack of financing as a critical obstacle. Unlocking investment to close the gap will require investors, governments and infrastructure operators to include natural capital solutions and to implement specific financing strategies.
This is part two of a written series that explores, through interviews, the perspectives and roles of different key stakeholders in breaking down barriers to scale NbS projects in Mexico. This series is part of the Climate Solutions Partnership (CSP), a five-year collaboration which combines HSBC’s financial expertise with the knowledge and experience of WRI, WWF and a network of local partners to scale climate solutions.
Nature-based Solutions (NbS) are a strategic alternative to address the climate crisis and biodiversity loss while also tackling a variety of social challenges, such as water and food security. Despite their great potential and the economic, environmental and social benefits they generate, investing in NbS projects is more than limited: the global financing gap towards protection of nature is more than $700 billion. Public financing alone will not be enough. To close this gap, it is imperative to attract private investors or to build the capacity of NbS projects to leverage private capital. Currently, most NbS projects are financed by public and philanthropic funds, while only 14% of capital is provided by the private sector. Within the private sector, banking institutions are key to promoting investment, since their practices and standards contribute to positioning NbS as attractive and economically viable alternatives within the sector.
As part of the efforts to unlock the great potential of NbS in the region, WRI Mexico interviewed members of three banking institutions to learn more about their visions for NbS. In part 1 of this series, the interviews explored the barriers that, from the bank’s perspective, prevent investment in NbS. Some of the barriers mentioned include novelty of the concept, lack of clarity and length of time on the return on investment, complex methodologies, and lack of tax and government incentives.
This installment of the series explores the role banks can play to break down the barriers to scale NbS, based on interviews.
Role of banks to scale NbS
1) Increase visibility and dissemination of NbS within the private sector
During interviews, the banks’ representatives were clear about the role their sector should play to foster the scaling of NbS. They specifically identified themselves as players that can increase the visibility and dissemination of NbS within the financial and private sector.
"The financial sector moves the economy, [...] we are a relevant key player with authorities and with diverse stakeholders of sustainable development. Even though we are not a highly polluting sector through our direct emissions, through financing we are able to indirectly support projects with great positive impact, by participating in the decarbonization of our portfolios and acting as advisors that push for sustainable transitions.” -Irma Acosta, Director of Responsible Business and Sustainability, BBVA
“Apart from financing projects, that is, besides being the ones who provide the capital for projects [...] our job also includes training clients on the existence of NbS and its benefits, avoiding a focus solely on the carbon footprint side." -Fernando Puente, Deputy Director of Sustainability, Banorte
Among the efforts made within the banking sector to highlight the link between ecosystem services and business activities is the Climate Solutions Partnerships (CSP), which seeks to accelerate the transition to net-zero by creating more opportunities to make climate solutions more commercially viable, as well as to protect and restore biodiversity.
Another relevant project is the Natural Capital Protocol, a standardized decision-making framework through which different organizations, including banks, identify, measure and assess their dependence and impact on natural capital. Understanding the complex relationships with ecosystem services allows the organizations to make more informed decisions. This also creates an important precedent that provides specific and contextualized information on the link between both sectors. Demonstrating this link can allow for NbS to be integrated into companies' value chains or into their climate adaptation and risk reduction strategies. Banorte stands out for having implemented NCP with hotel industry clients in Mexico. The results of their case study show how impacts of climate change and loss of natural capital represent financial risks for hotels and banks and highlight NbS as strategic approaches to address such risks.
2. Common offer among products
“Banks must offer a portfolio of green products suited to the needs of each line of business, since the needs of a person and those of a corporation are not the same.” -Aidée Olmos, Director of Corporate Sustainability, HSBC
Similarly, the interviewees highlighted the importance of having a common offer of products for NbS that maintain real commitments and the same rigor regarding objectives and Key Performance Indicators (KPIs) to ensure transparency and healthy competition, which prevents the laxest credits from receiving more clients and deters greenwashing.
“A product for wholesale banks that is generic we see perceive as complex; in most cases it has to be a tailor-made product for the project in question.” -Fernando Puente, Deputy Director of Sustainability, Banorte
However, due to diversity of NbS and the potential clients who may invest in these types of projects, there are challenges in developing a one-size-fits all product, since the characteristics of each project are associated with a risk profile and specific times. It is important to note that with creating this offer within the bank, a comprehensive market infrastructure should be provided, integrating products that are applicable to the various stages of NbS projects, such as benchmark assessments, monitoring and evaluation or capacity building.
"In addition to financial information, there must be public non-financial information that states commitments from people and companies on issues related to environmental, social and corporate governance." -Aidée Olmos, Director of Corporate Sustainability, HSBC
The creation of this type of product is still in the early stages. However, an innovative project offered by banks that enables investment in NbS is the Mangrove Bond, created by HSBC Australia and Earth Security. This project is developing a blueprint for market bonds to protect and restore mangroves. Although the project is focused on the Australian market and is being co-developed with local stakeholders, it is expected to work as an outline that can be replicated in other coastal cities that border mangroves.
Alternatives to Unblock NbS
1) Create pilot projects
"A good practice is to be involved with pilot projects. However, it is important to guarantee that there is the guidance, time, methodologies and information necessary to successfully develop projects within institutions. Pilot projects must also consider comprehensive approaches that support results; that is, they take the companies’ operations into account, as well as the scientific guidelines, government position and global trends, among other factors." -Britzia Silva, Deputy Director of Sustainability and Responsible Investment, Banorte
From the banking perspective, pilot projects are low-risk opportunities to engage in NbS financing. In addition, this type of initiative provides a clear picture on what NbS are, the expectations around results, timing, methodologies and partnerships involved.
To strengthen pilot projects, the interviewees deem strategic partnerships, such as with academia, government and non-governmental organizations, as essential. In addition, results from projects will provide timely data on the performance of NbS and will fill the information gaps perceived as barriers.
The Global Innovation Lab for Climate Finance (GICF) is an international program focused on identifying innovative climate financing tools in developing countries that create pilot projects and implement them on a large scale. They recognize that well-designed financial instruments can reduce risks perceived by private investors on sustainable financing and can also create new markets and attract new investors. Among the initiatives developed by GICF, GROVE: Forestry Smart Ledger favors the development of small-scale community forestry projects in mangroves. They connect communities associated with the mangroves with stakeholders interested in achieving carbon neutrality through a platform. They also use remote sensing to measure the carbon captured (which reduces the costs associated with third party validation) and integrate an accounting mechanism that ensures full transparency and efficient monitoring of financial flows.
2) Join forces
Scaling NbS is a shared goal, and efforts to promote their use are already happening in various sectors. From the banking perspective, it is important to carry out coordinated initiatives among stakeholders in order to encourage more members of the private sector to join.
"It is a reality that companies prioritize their profitability, therefore, it is not easy for them to quickly accept new initiatives whose main objective does not clearly show the cost-benefit. The role of sustainability is to train, to showcase the benefits, the importance, to catalyze action. However, it is necessary to link efforts and rely on experienced actors. This way, initiatives will gain more strength and be more successful.” -Britzia Silva, Deputy Director of Sustainability and Responsible Investment, Banorte
“The work carried out by non-governmental organizations is very important, since they accompany the communities executing the projects and increase their visibility.” -Irma Acosta, Director of Responsible Business and Sustainability, BBVA
Creating strategic partnerships is an opportunity to join existing efforts while taking advantage of the roles specific to each sector to overcome the barriers associated with NbS projects. In Mexico, Alianza Mexicana de Biodiversidad y Negocios (AMEBIN) (Mexican Alliance for Biodiversity and Business) is a coalition made up of members of the private sector, banking institutions and NGOs that looks to establish a dialogue to address issues related to conservation, sustainable use and restoration of biodiversity from a business perspective. Even though its primary focus is conservation, it sets a good precedent for cross-sector efforts that can be replicated for NbS.
3) Blended Finance
Blended finance strategies are key to unlocking the investment required for NbS. Blended finance consists of the strategic use of capital from public and philanthropic sources to reduce investment risk and to increase the bankability of projects, attracting larger amounts of private capital towards projects that contribute to sustainable development, while providing financial returns to investors. These strategies work best in scenarios where the finance sector would be willing to invest if the risks were lower. Blended finance projects involve collaboration between private, philanthropic and public capital.
For example, the project Risk Mitigation Instrument for Land Restoration, managed by the Inter-American Development Bank, combines a $15 million USD Global Environment Facility investment with $120 million USD in co-financing to implement innovative risk mitigation instruments to restore degraded lands in Latin America, such as intercropping, shade cropping and silvopastoral systems.
4) Determine Strategic Sectors
"We need to translate positive impact indicators into monetary terms. However, I think that for sectors that greatly depend on nature, it is easier to highlight the importance of those solutions [...] where we could pilot [...] more projects, and highlight monetary benefits and of course, benefits regarding sustainability, biodiversity and climate change." -Britzia Silva, Deputy Director of Sustainability and Responsible Investment, Banorte
Ecosystem services are not yet acknowledged in balance sheets, taking them for granted in business projections. Some economic sectors depend heavily on ecosystem services for the development of their activities. For example, coastal protection provided by mangroves and coastal habitats is critical for the hotel industry, while water flows that depend on the upstream catchment, facilitated by forested areas, are essential for bottling plants and soft drinks producers. For these sectors, the benefits of NbS projects are much more tangible, which is why they are strategic options
This tight link has been leveraged in several novel projects that use the NbS perspective. Coastal protection against storms, reduced beach erosion, sand creation and aesthetic appeal are some of the ecosystem services provided by the Mesoamerican Reef that contribute to the maintenance of Quintana Roo’s tourism industry. The insurance company Swiss Re and The Nature Conservancy identified this relationship devised insurance for coral protection, guaranteeing a rapid disbursement of funds for trained members from local communities to address reef damage following tropical storms. The government of Quintana Roo acquired this insurance, which protects 160 km of beaches. It is expected to set a precedent so that members of the hotel sector can acquire similar insurances.
5) Clear Methodologies and Goals
"What we expect from this type of initiative is to have available, clear and replicable methodologies that facilitate the training and integration of business areas to projects, and not only count on sustainability teams." -Britzia Silva, Deputy Director of Sustainability and Responsible Investment, Banorte
Amid the novelty that NbS can be, having specific scopes and processes helps give clarity to the projects and evaluate their economic viability. It is particularly important to have an established methodology that provides certainty to investors on how the scope of the project will be measured. The use of standardized methodologies or third parties that can certify the results contributes to reinforcing the sense of confidence in measuring the scope.
There are numerous ecosystem services and economic valuation efforts. For example, Coca-Cola Company has developed and tested a standardized methodology to account for the ecosystem service benefits from water replenishment. They determined that such projects provide ecosystem services that "reimburse" the original investment and generate a positive return on investment for society.
It must also be recognized that not all benefits can or should be monetized. Non-economic and financial indicators are also important for sound and useful decisions making. For example, current methods to monetize biodiversity benefits are still limited; non-monetary indicators are an obvious and needed alternative.
6) Ensure the Maintenance and Scalability of Achievements
"It is important that company donations consider long-term projects that involve communities where there are skills provided that allow projects to continue and give them scalability." -Aidée Olmos, Director of Corporate Sustainability, HSBC
For members of the private sector, it is very important that the objectives of the projects are met and that the scopes derived from investment are maintained over time. In this sense, the building of capacities among members of financed initiatives is a way of guaranteeing the success of the investment. By encouraging community members to acquire technical skills, the communities receiving the financing are better equipped to implement the projects effectively, guaranteeing the success of the projects and the viability of the investment. Currently, however, most funding for community-based capacity building comes from philanthropic and public funds.
Likewise, a strategy for maintaining the achievements across various NbS projects is the development of sustainable economic activities associated with the projects, which can provide a flow of capital independent of the investments made by the private sector. In this way, conditions are created that favor the scalability of projects and their maintenance over time, making them independent and self-sustaining. In the long run, the investments generated achieve greater impacts within the communities and ecosystems. An example is the RE3CO Project, financed by HSBC and implemented by WRI Mexico in association with the Small Grants Program (UNDP-SGF). The project seeks to support community restoration and conservation of mangroves in key sites by promoting actions for sustainable management of ecosystems and fostering the economic development of local communities and carbon storage.
7) Creating Incentives and Avoiding Greenwashing
Major environmental challenges, such as biodiversity loss and climate change, require global guidelines and treaties (examples include the Paris Agreement, Principles for Responsible Investment and the Sustainable Development Goals). Banks can begin the process of integrating NbS projects into their portfolios by following international guidelines. In turn, it is also vital that other stakeholders, in particular national and subnational governments, set clear lines and give signals to the market on priority issues. For example, since 2013, every company with more than 500 employees is required to issue an annual "environmental and social report" in France. This type of initiative can encourage improvements in reported indicators since companies seek to not be left behind in comparison to their competitors and consumers. At the same time, it increases transparency in the sector and makes visible the impacts of operations.
The interviewees also mentioned the strategic role of the government in creating incentives that drive the scaling of and investment in NbS, be it through blended finance, tax incentives and social responsibility requirements, among others. They discussed the possibility of investments in conservation, and the idea that social responsibility issues could have a mandatory quota for the private sector, accompanied by the implementation of accounting measures that allow verification of said contributions. Other proposed measures were to verify that the investing companies have strong commitments on sustainability issues to prevent NbS from falling into greenwashing practices.
The results of this series of interviews provide an overview of how NbS are perceived within the financial sector in Mexico and help identify specific actions that different players can take to scale them up. These interviews and the products generated also contribute to positioning the issue of NbS on the private sector’s radar.
The interviewees point out that banks play an important role in increasing the visibility and applicability of NbS, and as a union, they can come together to offer products with rigorous standards that simultaneously respond to the diversity of customer needs and variety of NbS. They also mention that the creation of pilot projects can bring an approach to NbS while maintaining a low financial risk for members of the private sector. On the other hand, the development of projects in sectors whose economic activities have a strong link with ecosystem services was proposed as another strategy for scaling up NbS. The creation of partnerships between strategic actors, the development of tax incentives, blended finance, the inclusion of activities that ensure the maintenance of the project's scope when the investments are withdrawn, and the implementation of standardized methodologies were other proposals mentioned to unblock financing barriers.
WRI Mexico continues to work toward unleashing the potential of NbS in the region. In addition to catalyzing discussion on this topic, WRI Mexico helps carry out NbS projects involving strategic actors within academia and the private sector, as well as local governments and communities. For example, the project Adaptation Based on Coastal Ecosystems focused on increasing adaptation to climate change in coastal communities through the restoration of mangrove ecosystems. Similarly, RE3CO supports capacity-building in mangrove-restoring communities, as well as the development of associated economic activities that ensure the maintenance of the achievements from the investments.
Although these endeavors are pioneering and pave the way for scaling NbS in the region, efforts still need to be joined up to make their enormous potential tangible. It is essential to highlight that the goals of the Paris Agreement will not be achieved through actions in a single sector. Efforts from NbS cannot replace forceful action by other sectors, such as power generation and transportation.
This article was originally published in Spanish on the WRI Mexico website.