The Finance Challenge

The global consensus increasingly acknowledges that addressing climate change requires substantial investments in the protection of nature and restoration activities. However, recent studies reveal that Nature-based Solutions (NBS) receive a mere 3% of total global climate funding (Altamirano, 2021). Presently, the world allocates approximately USD 133 billion annually to NBS endeavors, with a significant share (over 80%) stemming from public financing, of which roughly 10% is dedicated to wastewater management.

The collective sum of public sector funds, official development contributions, and philanthropic commitments falls short of bridging the financial gap, necessitating the mobilization of private sector capital. Private sector involvement remains constrained, primarily manifesting through investments in sustainable supply chains and environmental offsets. One issue is that assessment of capital inflows into NBS lacks consistency, yielding uncertain estimations (UNEP, 2021). Access to private sector investments in NBS for water security faces multiple challenges (refer to Table 3-2 for details) (World Water Council, 2022).

_{Table 3‑2: Key challenges and potential solutions for investing in NBS for water security}

Key Challenges		Potential Solutions
Financial: Uncertainty in project cost and investment time horizons	Accurate cost-benefit data are missing Benefits of NBS and return on investment can be long term in nature	Cost-benefit analysis/technical guidance support to develop evidence-based financial case Forward purchase arrangements to reduce the risk of long-term investment Fund mobilizing via blended finance
Commercial: Lack of standardized revenue models	There is a limited evidence base about how finance instruments and business models (e.g. green finance) can be leveraged to support NBS for water security Capital flows into NBS are not tracked or reported consistently	Standards can be developed for revenue monetization models and market can be encouraged by creating regulatory drivers Revenue streams can be created by monetizing cost savings and benefits via investment mechanism where payments depend on project performance pre-defined outcomes/targets
Knowledge: Limited investor understanding	NBS projects are acknowledged as awareness-raising projects rather than as bankable propositions (higher risk perception due to unknown risk profiles)	Blended finance approach can help to mobilize required private finance by lowering investment risk Investment mechanism where payments depend on project performance pre-defined outcomes/targets (outcome-payment mechanism) can help to address the performance uncertainty in payment structure
Compliance: Lack of regulations to promote NBS	Local regulatory schemes can support utilities or companies to invest in NBS	NBS-water security can be covered in road maps/ national plans and necessary regulation, e.g., regulative set-up for public-private partnership can be established
Logistical: Challenges in securing long-term stakeholder engagement	Implementation, maintenance, and monitoring of NBS projects rely on stakeholder engagement for proper functioning of NBS.	Early engagement, on-going communication, and cooperation with stakeholders and representation through appropriate governance can secure community support.

Although current funding sources are far from sufficient, there are promising developments for unlocking funding for NBS where economies are embedded within nature:

A strong message was conveyed from the US to the world regarding the imperative to upscale Nature-based Solutions (NBS) to take aggressive action against climate change and biodiversity loss during COP7 on November 8th, 2022.
The World Economic Forum (WEF) estimated that all businesses, either directly or through their supply chains, rely on nature, with at least $44 trillion of economic value generation (over half of global GDP) being dependent on nature and its services to people(World Economic Forum, 2019). Furthermore, the concept of "nature-positive infrastructure design" and complementary socio-economic transitions are projected to generate up to USD 3 trillion in annual business value and create 117 million jobs by 2030 (World Economic Forum, 2020)
Over 50 organizations, including the World Economic Forum, World Business Council for Sustainable Development, We Mean Business Coalition, the International Chamber of Commerce, and groups representing companies from nearly every continent, have come together to support NBS through 'Business for Nature(Business for Nature, 2020)
As of January 2021, 530 companies have made pro-nature commitments, with a significant increase in major funding pledges for a wide range of NBS options from the private sector. Examples include Unilever Climate and Nature Fund (€1 billion) for ecosystem restoration, protection and water security projects(Unilever, 2021), Shell NBS Programme (£300 M/year 2019–2021) to invest in NBS such as restoration and protection of wetlands (Shell, 2019), Amazon Right Now Climate Fund ($100 million) restore and conserve forests, wetlands and peatlands for carbon storage (Amazon, 2022).

The Finance Challenge

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