the finance innovators racing to save our ecosystems

Investing in nature-based solutions is only part of the story. Blamey acknowledges this too, and says that the “biggest tool” in Aviva’s toolbox is its efforts to engage policymakers, regulators and the wider industry to make changes. Unless the wider financial system moves away from activities that harm nature, “greening finance” will not be sufficient: total finance flows (both public and private) with direct negative impacts on nature totalled nearly US$7tn globally in 2023, according to UNEP – 35 times more than the total investment in nature-based solutions.

But some are optimistic that investment in nature can be significantly increased. 

Finance Earth mobilises private sector funding towards nature-based solutions, by supporting NGOs or social enterprises to develop investable projects, and then connecting those to capital providers.

Not all nature-based solutions are “bankable”, insists Finance Earth’s Richard Fitton. But there’s an increasing recognition that public sector and philanthropic money is nowhere near enough to fill the funding gap, so organisations focused on nature protection are increasingly looking at developing their commercial offering to attract private investors.

Despite growing sources of income like carbon credits, investing in nature-based solutions is still perceived as risky by some investors, explains Fitton, but new models are helping to address this concern.

Blended finance is often used to reassure and attract commercial investors – with government or philanthropy providing catalytic capital, for example that can take higher risk or accept lower than market-rate returns, in order to derisk the investment and crowd in private capital. 

Impact bonds – originally pioneered in the social investment sector – have also been successfully applied in the nature space. These involve a public body paying an organisation once it has achieved certain outcomes, with the upfront investment provided by an impact investor. 

Read more: What are social outcomes partnerships?

Fitton gives an example of DC Water, a water company in Washington, DC, which was trying to manage sewer overflow. One potential solution was to build ‘green’ infrastructure like rain gardens, permeable pavement and planter boxes to absorb and slow the flow of rain water into the sewers, but there was a risk that this new approach would not work. Thanks to an environmental impact bond, the water company positioned itself as an outcomes payer, and shifted the risk onto impact investors that were happy to cover upfront costs – in this case, Calvert Foundation and Goldman Sachs. “That’s effectively a risk transfer mechanism [from the outcomes payer] to impact investors,” says Fitton. 

The risk paid off: the project reduced run-off volumes by nearly 20% over five years, helping to reduce overflow in the stormwater system and enabling DC Water to expand its green infrastructure plans.

Speaking the right language

While the main message to investors is simple – “you can now make money from nature restoration” – they don’t tend to know what nature-based solutions are, explains Fitton. It is really important to speak a language that is familiar to them, so Finance Earth often talks about “nature-based infrastructure”.

“A lot of the investments in nature are very similar to infrastructure investments,” explains Fitton: they tend to be long term, generate recurring revenue (from the sale of carbon credits or biodiversity units), and usually require a large upfront capital investment – for example buying land to restore a woodland or peatlands.

Fitton compares the market for nature-based solutions to the renewable energy market of 20 or 30 years ago, when developers started creating renewable energy projects involving long-term leases, large upfront capital expenditure to build a solar plant or wind turbines and recurring revenue from selling energy. “That sector is very mature now, and there are lots of private sector developers who are quite sophisticated, and it’s all based on well-understood contractual mechanisms. What we’re trying to do in nature is to create the same conditions.”

The momentum is starting to build, according to Fitton – at least in the most established markets like the UK. “There’s more and more private sector developers coming in because they see the commercial opportunities… [of entering] into carbon projects and into biodiversity projects, where, traditionally, NGOs have been playing alone.”

Carbon credits are also a future-proof investment, he adds: companies that follow a net-zero strategy will never be entirely carbon neutral on their own, so they will look to carbon credits to offset their residual emissions, be it in 2050 or in 2100. Planting a woodland now will yield returns for a very long time.

The end of the carbon cowboys?

With many carbon transactions being voluntary, however, the scope for unregulated greenwashing is vast. “There are bad quality project developers out there who just want to make quick money; they don’t really follow good standards, and they try and sell carbon credits, and they tend to sell them at very low prices,” says Fitton.

But Fitton thinks the risk is lower now than it used to be – partly as a result of some high-profile scandals. “For years, the carbon credit world was dominated by those carbon cowboys and unsophisticated methodologies… that’s less of a problem now than it used to be.”  

There is an increasing number of initiatives to ensure integrity. “It’s actually much easier now to separate the good from the bad, and there are gold standards out there.” The UK has its own carbon standards that have been developed based on science, and backed by the government, explains Fitton. “They’re robust.”  

But a critical question is also: what is a responsible offsetter? “You can have a really good quality project, but if you’re just selling them to [polluters] carrying on business as usual, then the credibility of the market is gone,” says Fitton.

“It’s effectively a licence to carry on trashing the environment. And that’s where the real greenwashing risk is.

“So you not only have to have principles around the supply side, you have to have principles around who you’re selling to, and you have to be auditing those buyers.”