Nature-based Solutions in Latin America and the Caribbean: Financing Mechanisms for Regional Replication

Abstract

Innovative financing models are emerging globally to advance nature-based solutions (NBS) that can cost-effectively enhance infrastructure performance, meet Sustainable Development Goals, and mitigate the negative impacts of climate change. Despite the potential for NBS to generate attractive returns and provide significant cost-savings, these financing models remain underutilized. Consequently, NBS are not achieving their full potential and a tranche of pent up green capital is sidelined. This report highlights five proven NBS financing strategies that leverage private finance: green bonds, blended market-rate and concessional loans, land-based financing strategies, insurance policies, and endowments. This report also outlines current barriers to the successful scaling of these financing strategies in Latin America and the Caribbean and identifies the approaches and enabling conditions needed to overcome them.

Key Innovations in Financing Nature-Based Solutions for Coastal Adaptation

“…The issuance process of green bonds nevertheless requires significant financial capacity and resources to cover the upfront and ongoing transaction costs of green labelling and the associated certification, reporting, verification, and monitoring obligations. For this reason, green bonds are mostly issued by governments (CSs 1-3) [49,[61][62][63] or large utilities (CS 4) [49] to finance large investment programs that bundle several projects [64], while individual, smaller-sized projects might not reach the required investment size (FB 5). Further green bond issuances benefit from economies of scale, making these instruments particularly attractive to governments committed to long-term adaptation and NBS upscaling [65].…”

“…Further green bond issuances benefit from economies of scale, making these instruments particularly attractive to governments committed to long-term adaptation and NBS upscaling [65]. Another common issue is that a high credit rating of the issuer is needed for the green bond to be attractive to investors (CS 1 and CS 4) [49]. For issuers with insufficient credit ratings, development banks and conservation funds can provide credit enhancement instruments such as guarantees to reduce interest rates (CS 2) [61,62].…”

“…Financial expertise is a determining factor for successfully combining various NBS projects to generate collective revenues and mitigate risks. Real-world examples demonstrate that the capacity to consolidate assets and create financial products that align with investor expectations is primarily achievable by large entities such as governments capable of issuing green bonds (CSs 1-4) [49,[61][62][63] and specialised restoration investment funds (CSs 14-17) [82][83][84][85][86][87]. Project initiators without the know-how and resources to bundle projects and structure financial products would need the support of financial intermediaries.…”

“…Generally speaking, homogeneous projects with respect to the ESS delivered, type of NBS, used methodologies, etc., are easier to bundle than highly specific and diverse projects (FB 3). The local aggregation of NBSs with complementary built infrastructure-a green-grey hybrid approach-has been successful in unlocking synergies and attracting investors [19,49,69,75,88] (CSs 1, 4, and 8).…”

“…As financial innovation unfolds in a multitude of possible arrangements and variations [48], it is impossible to exhaustively cover all financial innovations. Hence, we focused on the innovative financial instruments proposed in the existing NBS literature that are supported by empirical evidence of practical implementation in NBSs [4,9,32,35,36,[49][50][51]. We therefore focused specifically on innovations aimed at leveraging investments and other resources from the private sector, given the acknowledged potential for the significant upscaling of NBS finance.…”