November 29, 2024 | Blogs
Cooling effects, improved air quality, better water drainage, and increased biodiversity: it’s widely agreed that our cities need more nature-based solutions (NBS). Yet, despite their clear benefits, securing funding for their implementation remains a struggle. Why are NBS primarily funded by public money? What deters private stakeholders from investing, despite the existence of tools and methods proving that NBS offer a monetary return on investment?
A workshop held during the Climate Alliance International Conference on October 10 2024 focused on moving beyond the rational arguments typically used to persuade investors to support nature-based climate adaptation, focusing instead on the irrational aspects of the investment decision-making process.
Through the lens of behavioural economics, the workshop shed light on the biases influencing investment decisions and provided insights into the development of nudging strategies to encourage private investment in nature-based climate adaptation.
The workshop started by acknowledging a fundamental paradox: while the environmental benefits of NBS are well documented, most adaptation projects are publicly funded. Private investors are largely absent, contributing only 3% of total NBS investment in Europe. Dr. Stefano Ceolotto, from the Euro-Mediterranean Centre on Climate Change, looked at the reasons for this gap and explored how behavioural biases might be at fault.
Traditional economic theory assumes that people, including investors, make rational, self-interested decisions that maximise their utility based on all available information. In reality, however, people’s behaviour often diverge from this ideal because it is influenced by psychological biases, emotions, and imperfect information. For instance, we rarely know all the options available to us, and we often fail to adapt our choices to new information. Fortunately, in many cases, people do care about others. These behavioural patterns may partly explain why private stakeholders invest so little in NBS, despite their proven benefits.
Dr. Ceolotto outlined two primary psychological biases that explain the reluctance of private investors in the NBS sector: the present bias and the status quo bias.
The present bias shows that people tend to overvalue immediate rewards while discounting future benefits and will often choose a smaller, immediate payout over a higher future one, even when it’s against their best financial interest. As NBS often take longer to show tangible returns compared to traditional “grey” infrastructure, this bias affects their adoption and funding by investors. In addition, their long-term benefits may not align with the immediate priorities of businesses and investors.
The status quo bias explains the general reluctance to change. Many companies stick to traditional methods, such as building concrete walls for flood control, only because these are familiar. Even when NBS could deliver better outcomes, the unfamiliarity of green infrastructure makes decision-makers hesitant to explore these alternatives. This bias can be particularly damaging because it discourages investors from exploring innovative solutions. Moreover, the standard practice in the industry often reinforces this resistance to change; if competitors and partners are not investing in NBS, businesses are less likely to break from the norm and invest in NBS themselves.
Dr Ceolotto raised a question regarding the methods used to analyse NBS projects. Investors often rely on cost-benefit analyses for their decision-making, but these analyses tend however to favour grey infrastructure due to the difficulty of quantifying the long-term and indirect benefits of NBS. Could it be relevant to explore alternative evaluation methods for NBS projects that would better capture NBS benefits or is it better to to use tools that private investors are familiar with, knowing that they are reluctant to change?
Finally, social norms were discussed as a potential lever when designing interventions to incentivise the diffusion of NBS. They relate to concepts of reciprocity, acceptability, reputation or social comparison and can take the form of, for example, an ESG rating. The PIISA project, which addresses insurance against climate-related risks, , is currently working on analyzing whether people are more likely to choose an NBS if they are presented with the social benefits of the project rather than just the private benefits.
In the second half of the workshop, Christina Gravert, Associate Professor at the University of Copenhagen and Co-founder of Impactually, explored how nudging techniques can help counter these biases and encourage private investment in NBS. Nudging, a concept rooted in behavioural economics, involves subtle changes to the decision-making environment that steer individuals toward desired actions without restricting their freedom of choice.
Dr. Gravert explained that one of the biggest challenges is the “intention-action gap” — the difference between what people say they want to do and what they actually do. In the context of NBS, companies may express interest in sustainable solutions such as green roofs, but fail to act due to inertia or more immediate concerns. Nudges can help to bridge this gap.
Participants brainstormed nudging strategies in a group exercise based on a fictive case: a municipality offers funding for green roofs and green facades on company premises, but there is little uptake by companies. What kind of nudging strategies could encourage companies to apply for this funding? Here are some of the results of the collective brainstorming that took place:
Behavioural economics plays a crucial role in overcoming the financial barriers to NBS. While public funding will remain essential, understanding human behaviour and decision-making can unlock new pathways for private investment. By addressing the psychological biases at play, we can design interventions that make NBS more attractive and help foster a more sustainable, climate-resilient future for our cities.
This workshop was organised in the frame of IB-Green, Invest4Nature and PIISA projects.
Authors: Marie Boutin & Hélène Rizzotti, Climate Alliance
Photo credits: Climate Alliance
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