The economic case for investing in NbS solutions is unassailable.
According to the WEF, $44 trillion (over half of the world’s GDP) of value “is generated in industries that depend highly (US$13 trillion) or moderately (US$31 trillion) on nature and its services.”
Conversely, biodiversity loss creates material economic loss. For instance, according to the World Bank, “the disappearance of pollinators would have immediate knock-on effects on the US$235 billion to US$577 billion of annual crop output that is directly attributable to animal pollination (IPBES 2019; 2016). Likewise, it is likely that loss of critical marine ecosystems such as mangroves, seagrass beds, and coral reefs would affect global marine fisheries that underpin important value chains.”
Enhancing or restoring biodiversity through NbS is often highly cost-effective. For instance, Dasgupta writes that green infrastructure like salt marshes and mangroves can be two to five times less expensive than gray infrastructure projects like breakwaters, and produce collateral benefits such as reduced damage from storms and erosion as well as increasing biodiversity.
NbS projects can positively affect the livelihoods of billions. Over a billion smallholders live in close proximity with nature. NbS programs can alleviate poverty while providing biodiversity benefits. And they generate many new jobs. Dasgupta writes that because they require “relatively low training and education requirements, are fast to establish, and require relatively little produced capital for each worker," NbS produce many locals benefit, resulting in large economic multipliers.
Current Funding Levels
According to the UNEP, "approximately USD 133 billion/year currently flows into NbS (using 2020 as the base year), with public funds making up 86 percent and private finance 14 per cent. Private-sector finance of NbS represents 14 percent of total NbS financing, equal to USD 18 billion annually. This is in contrast to climate solution investment, where most of the investment comes from the private sector."
The targets of private sector financing are varied, with most going towards sustainable supply chains, biodiversity offsets, and equity impact investing.
Under investment and the tragedy of the commons
Despite their inherent value, nature-based resources are not properly valued by current economic systems. This results in a tragedy of the commons scenario where they are insufficiently financed. The financing gap is substantial. It is estimated that the biodiversity financing gap for the next decade will be US$711 billion per year. The Paulson Institute (Deutz et al. 2020) estimates that the financing gap to reverse the decline in biodiversity by 2030 is between US$598 billion and US$824 billion per year (US$711 billion per year on average).
Investment in NbS will involve the public and private sectors, with carbon credits playing a significant role. Investment in NbS ought to at least triple in real terms by 2030 and increase four-fold by 2050 if the world is to meet its climate change, biodiversity and land degradation targets.
Unfortunately, financial flows that are harmful to biodiversity, such as fossil fuel and agricultural subsidies, continue to overshadow biodiversity finance. Governments alone spend five to six times as much in economic support that is potentially harmful to biodiversity each year as total spending on biodiversity (OECD 2020a), and the total volume of brown finance (finance that undermines biodiversity goals) is likely to be many times as large.
What the future holds for NbS
Looking forward, according to Vivid Economics, “investment in NbS ought to increase four-fold in real terms by 2050 if the world is to meet its climate change, biodiversity and land degradation targets. This acceleration would equate to cumulative total investment of up to USD 8.1 trillion, and a future annual investment rate of USD 536 billion. Forest-based solutions alone would amount to USD 203 billion/year, followed by silvopasture with USD 193 billion/ year, peatland restoration USD 7 billion/year, and mangrove restoration USD 0.5 billion/year.” (The Vivid report does not cover all types of NbS, for example, marine environments were excluded.)
To achieve this acceleration, governments are beginning to create policies and regulations to overcome the tragedy of the commons and to support the creation of more strong and stable revenue streams for NbS activities and assets. A Knowledge 4 Development Help Desk report writes that:
NbS have gained a lot of policy attention in recent years and have moved rapidly up political agendas. This includes being highlighted in recent high-level global assessment reports by e.g. the Intergovernmental Panel on Climate Change (IPCC) and the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES), and being recognised in international agreements and conventions, including the United Nations Framework Convention on Climate Change (UNFCCC) and its Climate Action Pathways2 (Chausson et al., 2020; Seddon et al., 2021; Kapos et al., 2019).
For example, 70 of the 167 initial Nationally Determined Contributions (NDCs) submitted under the Paris Agreement include actions broadly aligned with EbA, and a further 33 countries refer to conservation activities – and these commitments are more prevalent among developing countries compared to high-income countries (Kapos et al., 2019, p. 18). NbS are also the focus of a growing number of programmes by governmental and non-governmental organisations, and the private sector (Seddon et al., 2021, p. 1521).
This will greatly enhance the opportunities for private equity investment.
Voluntary carbon credit markets are also accelerating access to capital for NbS projects. Issuances have risen steeply over the past four years. That said, demand is currently outstripping supply.
Carbon Credit Market Expansion (https://www.iif.com/Portals/1/Files/TSVCM_Report.pdf)
As the market matures, the quality of the offsets should improve. On the demand side, there is increasing awareness that the entities (usually in hard to abate sectors) must use the offsets as a temporary measure and be committed to a plan to significantly reduce their emissions. On the supply side, there are more efforts to ensure that offsets are in fact reducing net emissions, are not engaged in double counting, and are benefiting local communities and biomes.
The Bottom Line
We’re in the first chapter of NbS finance. Investors are already making excellent returns at scale in the food and agriculture space. Other solution areas will take longer to mature. Our take is that what once seemed unreasonable will, sooner than most imagine, become core investment opportunities. History will be made.
Once again, the investor mantra should be “act now, and prepare for much more.”