Figure 1: Annual deal count and aggregate financing of blended transactions for NbS within Convergence’s Market Data, 2014-2023
As the global annual investment gap to safeguard the natural environment rises above $700 billion, there is a critical need to scale up financing for nature-based solutions (NbS). NbS are defined as efforts to protect, manage, and/or restore ecosystems to address societal challenges like food insecurity, climate vulnerability, and public health. Convergence recognizes NbS alignment if nature explicitly drives revenue or impact within the transaction.
It is estimated that $44 trillion of economic value generation, over half the world’s total gross domestic product is moderately or highly dependent on nature and its services. Beyond economic consequences of failing to protect natural environments, investing in NbS offers significant returns; for instance, the benefit-cost ratio of protecting mangroves for coastal protection is estimated at more than five-to-one. NbS are also critical in combatting the negative impacts of climate change, with the potential to deliver up to 30% of the mitigation efforts needed to achieve the Paris Agreement.
Blended finance can play an important role in developing this nascent market by helping to mitigate the risks associated with investing in NbS. According to Convergence’s Market Data, there have been 48 recorded blended NbS transactions over all time, totalling $4.7 billion in aggregate finance. Convergence’s latest data brief analyzes how blended finance has been used to date to support NbS transactions, presenting insights from an analysis of transactions within Convergence’s Market Data and interviews conducted with industry stakeholders. This blog provides an overview of NbS blended data trends, along with the opportunities and challenges of applying blended finance in this space.
Highlights from the brief:
NbS transaction sizes tend to be smaller than those in the broader blended climate market
NbS transactions typically have a smaller deal size than the broader climate market. The median deal size of NbS transactions is $40.8 million, compared to $69.9 million for all climate transactions. 23% of NbS transactions are between $10-$25 million in deal size. Alongside the nascency of the market, these transactions are more complex, bespoke and highly location-specific. This results in higher transaction costs due to specialized assessments and expertise to accurately quantify and measure environmental and financial returns. Moreover, NbS transactions have longer maturity periods than traditional investments, as returns are often tied to natural growth cycles and environmental restorations.
The largest NbS transaction recorded in Convergence’s Market data is Climate Investor 2, an $875 million fund targeting opportunities in the water, sanitation and oceanic infrastructure and preservation sectors. The fund, which is active in Sub-Saharan Africa, Asia, and Latin America and the Caribbean (LAC), received an investment-stage grant from the Green Climate Fund, and first-loss equity to improve the risk profile of the fund for commercial investors.
Figure 2: Blended NbS transactions vs. all blended climate transactions by size (USD)
Blended NbS transactions use higher levels of TA than climate blended transactions
The two most leveraged blending instruments in NbS transactions are concessional debt/equity (79%) and technical assistance (TA) funds (46%). TA funds are deployed at higher levels than in the broader climate blended finance market (27%). The NbS market lacks standardized, quantifiable outcomes and generates a range of co-benefits that are difficult to monetize as revenue streams. TA helps mitigate this barrier by providing funding to create specialized measurement and verification assessments to quantify and capture the environmental and monetary returns of NbS projects, as well as improve project transparency to build investor confidence.
As well, local communities offer valuable knowledge of the unique biomes where NbS projects unfold. TA, alongside design-stage funding, can ensure proper integration of this knowledge and adequate training to build comfort of the project locally, which is necessary for the transaction’s success. Guarantees, while typically underutilized in this sector, can also be catalytic in attracting private capital to the sector. Given the barriers to establishing reliable revenue streams, guarantees can be leveraged to provide a more secure environment to pilot innovative measurement approaches.
Figure 3: Blended NbS transactions vs. all blended climate transactions by archetype
Challenges and opportunities for blended NbS transactions
Use concessional instruments to build a pipeline of bankable transactions can help overcome challenges in attracting private investors to a nascent NbS market.
The early development stage of the NbS market serves as a predominant barrier in mobilizing private investors to the sector. Many emerging products are managed by first-time investment managers in the space or new entities lacking the traditional track record required by institutional investors. This nascency is further compounded by a knowledge gap, stemming from a lack of information and capacity among practitioners and policymakers, and a lack of completed projects to inform future investment decisions. These issues are exacerbated by the highly localized nature of investments, and current lack of enabling environment, all factors deterring private sector participation.
Concessional instruments can help address these barriers by building a pipeline of bankable transactions and supporting the growth of NbS markets. These instruments can generate the necessary evidence needed to standardize project design, implementation approaches and impact measurement, improving market viability and investor confidence. For example, TA and design-stage grants can be used to conduct field studies and cost-benefit analyses to demonstrate the impact of projects, while results-based financing, particularly impact bonds, can link financial returns to verified environmental outcomes.
Address longer maturities and revenue periods using below-market rate patient capital
NbS inherently require longer time periods to reach maturity and yield measurable outcomes as they are intrinsically linked to natural growth rates. Many of the associated benefits of NbS are not realized until years after the initial investment and may vary depending on the type of intervention in place. The prolonged time horizon of NbS oftentimes does not align with the fiduciary mandates of many financial entities and private investors that seek predictable and timely returns. The issue is further exacerbated by the lack of an enabling environment that offers long-term incentives to mobilize private investments to NbS.
This barrier can be partially addressed using below-market patient capital, including concessional guarantees, long-term equity and debt with longer tenors. This capital allows funds to support NbS transactions with longer timelines, while still accommodating the return expectations of commercial investors. Additionally, patient capital can provide working capital to help existing projects integrate NbS during periods of transition. For example, longer-term financing structures and concessional funding can improve the feasibility of sustainable transition loans for farmers and financial institutions.
In conclusion, despite its potential, blended finance in the NbS sector remains limited. To increase private sector participation, the market must overcome key challenges, including market nascency and extended project timelines, amongst others. Blended finance, through the use of concessional instruments and patient capital, can help address these barriers and unlock the environmental, social and economic benefits of NbS.
