Investment case for natural capital ‘needs to be stronger’ – UN report

The second State of Finance for Nature report found that nature-based solutions are underfinanced if the world is to meet climate and biodiversity goals.

The State of Finance for Nature 2022 report, compiled and published by the UN Environment Programme and the Economics of Land Degradation Initiative, has identified a large gap in funding for nature-based solutions if the world is to meet goals around emissions reduction, biodiversity loss and land degradation.

The report found finance flows to nature-based solutions are currently $154 billion per year, which is less than half the $384 billion per year of investment needed by 2025, and only one-third of the $484 billion annual investment needed by 2030 if the world is to limit global warming to below 1.5C and halt biodiversity loss.

“Urgent and large increases in finance for nature are essential,” the report says, with “delayed action […] no longer an option in the face of the devastating effects of climate change, the extinction crisis and severe land degradation globally”.

In particular, the report found that private sector investment in nature-based solutions needs to increase “by several orders of magnitude” from the current $26 billion per year, which accounts for around 17 percent of total investment in the space.

Of the $26 billion of private investments in nature-based solutions, the report found that $8 billion is deployed into sustainable supply chain investments, $6 billion into biodiversity offsets, $3 billion in payments for ecosystem services and another $3 billion in impact investments. Further flows to carbon markets and from non-governmental organisations and philanthropic entities account for around $2 billion each per year.

“The small share of private finance to nature-based solutions compared to public funding, reflects the relative novelty of investing in natural capital and suggests that the investment case, ie. the return to the investor relative to the level of risk, needs to be stronger,” the report found.

“In contrast, the volume of climate finance is much larger than nature-based solutions or nature finance. Returns to investments in low-carbon transport, renewable energy and energy efficiency are attractive and becoming well understood by development finance institutions, commercial banks, investment banks and institutional investors.

“Nature-based solutions investments, on the other hand, are poorly understood, have high (perceived) risks and often lack sufficient predictable, long-term revenue streams, thereby deterring banks and investors. Other barriers reflect the current immaturity and small scale of the asset class, such as high transaction and structuring costs.”

The report found that while philanthropic capital deployment and carbon markets has grown significantly since its first edition in 2021, there has been “very little” increase in impact investment and investment in sustainable supply chains.

“This is in stark contrast to the myriad of net-zero and deforestation-free commitments made by agri-food companies, banks and investors, which have seen too little action and too little capital deployed,” it said.

The report has been published a week before global government representatives gather for the UN Biodiversity Conference (COP 15) in Montreal, Canada, where it is expected nations will adopt an agreement to halt and reverse nature loss by 2030.

Governments currently provide 83 percent of finance flowing to nature-based solutions, the report found, with global fiscal challenges meaning that the private sector will have to account for an increasingly large share of these flows if targets are to be met.

In a statement, UNEP executive director Inger Andersen said: “The science is undeniable. As we transition to net-zero emissions by 2050, we must also reorient all human activity to ease the pressure on the natural world on which we all depend. This requires governments, business and finance to massively step up investments in nature-based solutions because investments in nature are investments in securing the future for generations to follow.”