De-risking through Ecosystem Building
Building the NbS ecosystem requires multiple stakeholders to work together across different interconnected layers of the economy. These can be divided into four groups: i) government and public policy decision-makers; ii) capital holders and allocators; iii) investment pipeline (including projects, corporates, and cooperatives); iv) people and communities.
With the appropriate support, these stakeholders can each contribute to a robust ecosystem; on the other hand, if inadequately addressed, significant gaps may arise that prevent impactful results. For instance, policy and regulations (e.g., on land rights) can prepare the ground for investment in sustainable agriculture, but will amount to little if beneficiaries lack the appropriate tools or financing to adopt relevant practices. Support to build the NbS ecosystem and thus de-risk investments is vital and can be provided through direct technical or financial assistance.
Relevance of different stakeholders in the NbS Financing Chain
Source: Climate Policy Initiative, 2024
Each of the following four cases uses some type of ecosystem-building approach targeting one or several of the layers described above. They use a combination of techniques including (i) direct TA provided to pipeline and communities, (ii) patient and grant capital for pipeline development, and (iii) concessional capital for the development of new vehicles that direct investment into NbS.
Key Learnings on de-risking through ecosystem building
The four ecosystem-building cases apply resources (e.g., TA and concessional capital) to different stages of the investment value chain to foster enabling conditions that can de-risk investments. They all support ecosystem building and target different layers of the economic system to surpass barriers to investment in NbS. Key lessons from these cases are presented below.
- Technical and financial support can be deployed through different layers and stakeholder groups to achieve investment objectives. The Living Amazon Mechanism’s Enabling Conditions Facility supports communities with services like health and infrastructure. Meanwhile, Moringa supports smallholder farmers to ensure that NbS interventions are applied effectively. The Global Fund for Coral Reefs directs support to move projects from early-stage to investment-ready, and the Restoration Seed Capital Facility supports new financial vehicles that can invest in an NbS-targeted pipeline.
- TA can take many forms and can be used to both ensure impact integrity and de-risk investment. It is important to know what type of support is needed to generate the intended results. For example, the Moringa Fund deployed TA to support smallholder farmers to manage their land sustainably and produce products to sell to SME processors in which the fund had invested. However, despite many positive lessons and impacts, investees could not generate sufficient financial returns to meet the investor’s objective and this Fund will not be replicated. Although the TA provided was key for the implementation of NbS, it was not sufficient to generate financial returns from the agri-SMEs involved in the value chain.
- Scaling NbS requires more than just directing capital to these initiatives but that these approaches are prepared to receive capital investments. Channeling investment into pipeline that is not ready to receive it can contribute to frustration from capital providers and an idea that certain sectors are not investible. As the Moringa Fund shows, sometimes TA is not sufficient to fully de-risk investment and a blended capital structure approach is also needed. In this case, concessional capital might allow the Fund to invest in projects with lower return expectations and over a longer period. An approach similar to the GFCR where the tehcnical assistance provided is accompanied with concessional capital at an initial stage to later be followed by commercial capital might better aligned with the timeframe necessary for the TA interventions to generate the conditions for returns to be obtained.
