Mobilizing Finance for Nature-based Solutions

Mobilizing Finance for Nature-based Solutions
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ABOUT THE REPORT

We recognize the pivotal role that financial institutions like SMBC play within the nature ecosystem; we are essential allies in channelling Nature-based Solutions (NbS) investments, structuring nature-positive financing, and helping businesses integrate environmental risks into financial decisions. Financial institutions’ strategic role and collaboration with stakeholders will be crucial for the shift towards a stable and nature-positive Southeast Asia (SEA) economy.

This year, SMBC held two roundtable sessions, one in April as the headline sponsor of Ecosperity Week in Singapore and another in September. Bringing together a curated group of diverse nature investment professionals, corporate clients, and non-governmental organizations, the participants explored strategies to bolster NbS in SEA through innovative financing that offers both ecological and financial gains.

This report summarizes and shares insight from the roundtable sessions to foster continued collaboration and opportunities beyond the scope of the participants, with a key focus on exploring pathways to unlock solutions for banks like SMBC to materially close the nature finance investment gap.

The full list of contributors and sources of references is available in the report repository.

KEY DISCUSSION OUTCOMES

1Carbon Markets
2Management of Ecosystem Services
3Alternative business models
4Technology and innovation
1Carbon Markets
Mobilizing Finance for Nature-based Solutions

According to BloombergNEF, although 2023 set a new annual demand record, the increase was only 2% from 2021. The market is currently oversupplied by nearly 50%, and many companies have stopped using offsets due to criticism and rising prices. If elastic demand persists with rising prices, companies might purchase 1 billion offsets annually by 2030 and 2.5 billion by 205028.

Financial institutions such as banks, brokers, and investment firms are crucial, acting as facilitators, intermediaries, and liquidity providers, reducing market opacity, creating transparent pricing, and managing risks.

While demand for offsetting is projected to grow, carbon credits also offer investment opportunities due to rising carbon costs and potential for portfolio diversification.

With significant regional variations in carbon prices, there is considerable potential for high-quality carbon credits to increase in value. Voluntary carbon credits could become a distinct asset class, allowing financial institutions to offer range of investment solutions.

Furthermore, new funds might invest in real assets that generate carbon credits, and banks may expand financing for such projects. As voluntary carbon markets mature, financial services should explore opportunities in Asia's expanding Voluntary Carbon Markets beyond offsetting.

2Management of Ecosystem Services
Mobilizing Finance for Nature-based Solutions

Proper management of ecosystem services can generate significant revenues through various means.

  • Healthy watersheds improve water quality, monetized through usage fees and payments for ecosystem services schemes.
  • Sustainable agriculture and sustainable forestry practices produce high-value products.
  • Biodiversity offsets, recreational services, and the protective benefits of ecosystems like mangroves and coral reefs also create financial returns. Carbon sequestration projects allow the sale of carbon credits, while natural areas attract tourists, creating income from park fees and hospitality services. 
  • Additionally, ecosystems provide genetic materials for pharmaceuticals, further contributing to economic opportunities.

Financial institutions can support these initiatives by increasing visibility and dissemination of NbS and offering green, blue and sustainability linked financing solutions with performance linked to implementation of best-in-class practices. 

Financial institutions can also support forming crucial strategic partnerships with NGOs and governmental authorities.

3Alternative business models
Mobilizing Finance for Nature-based Solutions

Existing essential businesses for the economy can adopt more efficient and environmentally beneficial "alternative" methods, which do not require technological innovation. Examples include:

  • The "Production-Protection Model" established by RGE aims to integrate sustainable practices that protect forests, peatlands, and human rights while promoting responsible production in its operations.
  • "Regenerative agriculture" refers to farming and grazing practices that focus on restoring and enhancing soil health, biodiversity, and ecosystem services, aiming to improve the overall resilience and productivity of agricultural systems.

Financial institutions can support the adoption of alternative business models through sustainability-linked instruments tied to metrics to promote expansion of protected areas or production areas with regenerative models deployed.

Additionally, they can engage in equity investments in funds dedicated to promoting regenerative agriculture practices.

4Technology and innovation
Mobilizing Finance for Nature-based Solutions

Technology and Innovation play pivotal roles in enhancing the effectiveness and scalability of nature-based solutions (NbS). Coral reef restoration represents a key example. 

These innovations help in improving biodiversity outcomes and increasing ecosystems resilience.

Financial institutions can support these technological advancements in several ways. 

  • Firstly, they can provide funding and investment for research and development of these technologies, enabling scientists and innovators to refine and scale their solutions.
  • Secondly, financial institutions can establish investment vehicles such as venture capital, impact investments, and grants specifically targeted at technology driven NbS projects like coral reef restoration.
  • Thirdly, they can facilitate partnerships between technology providers, conservation organizations, and local communities to ensure the effective deployment and adoption of these innovations on the ground.
  • Lastly, financial institutions can incorporate these technological advancements into their risk assessments and valuation models, thereby incentivizing more investments in sustainable and technology enabled NbS initiatives.