Nature represents 30 percent of the solution to climate change yet receives investment amounting to just 0.01 percent of global GDP.

Even with the growing attention around the importance of nature-based solutions in decarbonising our economies, protecting human health, and boosting biodiversity, we have yet to see private sector money flowing into this space.

Why the Disconnect?

Despite nature-based solutions in tropical landscapes’ well-documented potential to sequester large volumes of carbon and to mitigate a host of climate risks, returns are often seen as unpredictable.

Most climate investments remain focused on the well-established and comparatively lower-risk renewable energy sector. Only USD 133 billion – primarily from the public sector – goes towards nature each year: a fraction of the USD 8.1 trillion the UNEP has determined will be needed by mid-century to stay within 1.5 degrees of warming. Forest-based solutions alone require around USD 203 billion annually.

The recent Glasgow Leaders’ Declaration on Forests and Land Use made some headway in committing a new package of funding for protecting and restoring the world’s forests, with pledges of USD 12 billion public and USD 7.2 billion private sector investment.

But much more is needed.

In a new report from Palladium’s Partnerships for Forests (P4F), the team shares lessons for those in the private sector on de-risking nature-based investments/ The recommendations stem from their experiences supporting more than 50 regenerative businesses across the tropics to be ready to go to market, and leverage private sector investments.

“For P4F, social and environmental impacts are the key measures for selecting which businesses to support,” explains Katie McCoy, Team Leader of Partnerships for Forests. “There are a lot of potentially transformative ideas out there, but they need tailored support to fully understand and then tackle the main barriers to investment.”

Private sector organisations – from small enterprises through to impact investors or fund managers – are willing to invest in natural climate solutions, but there is a knowledge gap around the risks, barriers, and opportunities in this kind of investment. Issues such as tenure insecurity, uncertain returns, and weak supply chain governance commonly hold up would-be investors.

Business incubators and other technical assistance providers that support regenerative businesses – from early-stage enterprises aiming to get off the ground to more established enterprises wanting to take on more sustainability-focused ways of doing business – have a key role to play in filling this gap and boosting private sector confidence.

Creating an Investable Pipeline

Other incubators can also support nature-based solutions by offering this kind of technical assistance to create an investable pipeline of models ready to attract private capital.

Drawing from the experiences of businesses supported by P4F and further detailed in the report, five focus areas have been crucial to changing investor attitudes towards risk:

1. Building organisation and investor confidence with due diligence – This is especially critical for early-stage businesses who often need support building internal management capacity, setting up the right procedures and policies, and finding solutions to critical institutional and operational risks.

2. Taking time to build effective and lasting partnerships – With their ability to connect a network of cross-sector partners, incubators can help matchmake businesses in immature supply chains with relevant experts.

3. Supporting businesses to create solid business plans – This is particularly important for small forest-based businesses that have a clear focus on environmental and social returns yet find it difficult to create long-term strategies for growing profits.

4. Using pilots to prove business models – Without proof of concept many great ideas will never attract capital. Helping businesses to properly plan and execute these is crucial.

5. Addressing the pre-conditions for scale-up – This includes improving investment strategies and addressing operational risks associated with increased production.

Tackling issues that commonly give investors cold feet will be a crucial step towards mainstreaming private sector investments in nature. As the once novel renewable energy sector has done, nature-based solutions must become a viable asset class if we are to see the level of investment needed to keep climate and biodiversity goals on track. Incubators can play an important role here in making nature a safer bet.

Through incubation support, finance and technical assistance, Partnerships for Forests (P4F) catalyses investments in which the private sector, public sector and communities can achieve shared value from sustainable forests and sustainable land use. P4F is managed by Palladium in partnership with SYSTEMIQ. P4F is funded with UK aid from the British people.

As of 2021, P4F has successfully raised over GBP263 million from private investors through its de-risking work.