Unlocking Private Capital for Nature-Based Solutions: Insights from the Invest4Nature Survey

January 8, 2025 | Blogs

Nature-based solutions (NbS) are increasingly recognized as a critical component of sustainable development, offering benefits for climate change mitigation, biodiversity preservation, and land restoration. However, despite their potential, private investment in NbS remains limited. A recent survey conducted by the Inves4Nature project sheds light on the challenges and opportunities facing private financiers in this space, providing valuable insights into the current investment landscape.

The Context: Why Invest in NbS?

According to the 2023 UNEP State of Finance for Nature report, global investment in NbS stands at $200 billion, with private finance contributing only $35 billion. This is dwarfed by the $4.9 trillion in nature-negative private sector flows. To meet the 2030 targets for climate, biodiversity, and land restoration, investments must triple, and private capital will play a pivotal role in bridging this gap.

Recognizing this urgency, the diagnostic private capital community survey aimed to explore how financial institutions perceive NbS investments or lending, the barriers they face, and the tools that could help overcome these obstacles.

Defining NbS “Investability” and “Bankability”

One focus of the survey was to clarify the terms “bankability” and “investability,” which are often used interchangeably but hold distinct meanings for different types of financial institutions.

• Investment Funds: Predominantly concerned with “investability,” funds prioritize alignment with sustainability goals and financial growth potential.
• Banks: Focused on “bankability,” banks emphasize the financial health and creditworthiness of recipients.

These differing perspectives highlight the need for tailored approaches when designing NbS projects to attract diverse types of private capital.

Barriers to Investment: A Multi-Faceted Challenge

The survey, building on previous findings from the European Investment Bank, identified and ranked a range of barriers to private sector investment in NbS. The most significant and pressing challenges are:

• High Transaction Costs: The small scale and complexity of individual projects drive up costs.
• Higher Risk Profiles: NbS projects often come with inherent uncertainties and long timeframes for returns.
• Regulatory Hurdles: Lack of inclusion in overarching policy targets and goals, as well as in sustainable finance taxonomies creates ambiguity.
• Data Deficiencies: Limited monitoring, reporting, and verification processes hinder due diligence.
• Revenue Uncertainty: Many NbS projects lack clear, reliable revenue streams, making them less attractive to traditional investors.

Interestingly, respondents emphasized that many of these barriers—such as data and methodology gaps—are addressable through targeted interventions and research-based innovations.

Opportunities Within the NbS Landscape

Despite the challenges, the survey revealed promising opportunities for private sector investment in NbS:

• High-potential sectors: agriculture, water management, forestry, and urban NbS were identified as having the greatest investment appeal.
• Sustainability-aligned capital: Sustainable and impact-focused investors demonstrated a stronger willingness to engage with NbS, particularly projects tied to climate change mitigation, adaptation and biodiversity goals.
• Green bonds: emerged as highly suitable for funding NbS, with their appeal spanning conservative and risk-tolerant investors alike.

Policy Solutions: Paving the Way for NbS Investment

To unlock private capital for nature-based solutions (NbS), strategic policy interventions are essential. The investor survey, conducted as part of the Invest4Nature project, highlighted the most urgently required policy measures to overcome existing barriers and foster an enabling investment environment. Below are recommendations tailored to the local, national, and EU levels, reflecting the insights from the survey.

Local Level Recommendations

• Integration of NbS into Urban Planning and Zoning
  Local governments should better accommodate NbS within spatial planning and zoning regulations.
• Green Bonds at Sub-Sovereign Levels
  Municipalities can issue green bonds dedicated to NbS, leveraging them as a financing tool for local projects. These bonds can appeal to investors seeking sustainable and low-risk opportunities while addressing specific community needs.
• Collaboration with Private Sector Investors
  Local governments should work closely with sustainable lenders and investors to co-develop and finance NbS projects. Partnerships can help reduce risks and ensure alignment with both environmental goals and investor expectations.

National Level Recommendations

• Clear National Targets for Nature and Biodiversity
  Governments should establish explicit targets and action plans for biodiversity and natural capital, including NbS. Such commitments provide certainty for private investors and signal the importance of NbS in achieving national goals.
• Integration of NbS in Climate Strategies
  National climate action plans should clearly articulate the role of NbS in addressing both mitigation and adaptation goals. Linking NbS to these strategies can position them as essential tools for achieving carbon reduction and resilience objectives.
• Biodiversity Impact Compensation
  Introducing requirements for biodiversity compensation or offset schemes can create structured revenue streams for NbS projects. For instance, industries that cause unavoidable environmental damage could be mandated to finance NbS as part of their compensation obligations.

EU Level Recommendations

• Inclusion of NbS in Sustainable Finance Frameworks/Taxonomies
  Explicit integration of NbS into the EU Taxonomy of Sustainable Economic Activities is essential. This step would provide clarity on what qualifies as a sustainable NbS investment, reducing uncertainty for financiers and easing due diligence efforts.
• Alignment of Green Bond Standards with NbS
  The EU Green Bond Standard should explicitly include provisions for financing NbS. This would encourage broader adoption of green bonds as a tool for funding high-quality NbS projects across member states.

• Standardized monitoring and reporting Effective monitoring and evaluation systems are vital for tracking the implementation and outcomes of NbS projects, capturing both ecological and socio-economic outcomes. To ensure transparency, standardized reporting mechanisms should be implemented, offering consistent and comparable data for better decision-making by stakeholders

A Coordinated Approach for NbS Private Capital Financing

The recommendations above underscore the need for coordinated actions across governance levels to address the barriers hindering private investment in NbS. Local governments must work on adapting spatial planning policies and foster collaboration with investors. National governments should lead with clear targets, supportive regulations, and innovative compensation mechanisms. At the EU level, integrating NbS into sustainable finance frameworks, taxonomies, green bond standards can create an environment conducive to scaling private capital flows.     

Author: Linda Romanovska, Melomys Advisory

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To read more about the diagnostic private capital community survey:

Tedeschini, F. R. Blaettner, D., Tuerk, A., Klinkenbergh, O., McQuaid S., Brangan, E., Romanovska, L., Chen, W., Chakravorty, D., Furuseth, I.S. (2024). Markets, financing and incentives for NbS. Invest4Nature Deliverable 3.3. Invest4Nature. Horizon Europe Grant No. 101061083. https://doi.org/10.5281/zenodo.13997980