Banking on Nature | Scaling Nature Finance
Written by Sourajit Aiyer, Insight Contributor and author of the Banking on Nature series at In|Flow
In this 5th edition of Banking on Nature, we dive into the topic of Scaling Nature Finance through Blended Finance, Market Mechanisms and Capital Mobilisation.
As banks assess nature risk, integrate it into credit processes, and structure transactions in nature-positive sectors, another challenge relates to scalability.
The question facing bankers here is not whether nature-positive projects can be financed, but how capital can flow into these sectors in a consistent, risk-adjusted and commercially viable manner to enable scale-up in financial flows. Most nature-positive projects, say ecosystem restoration, regenerative agriculture, sustainable forestry or water resilience, may not meet standard bankability criteria on a standalone basis. Their risk-return profiles, long gestation periods, uncertain revenue streams and reliance on evolving market mechanisms would require a different approach to capital mobilisation.
The constraint lies in the mismatch between project characteristics and conventional lending models. Nature-positive projects often involve high upfront capital expenditure, delayed and uncertain cash flows, exposure to ecological variability, and dependence on alternate revenue streams such as biodiversity or carbon credits. These weaken traditional credit metrics such as interest coverage ratios, shorten the visibility of repayment sources, etc. And so, many projects fall outside the risk appetite of banks if evaluated on standard underwriting frameworks. Bridging this gap may require the use of blended finance structures and other mechanisms that redistribute risk across different capital providers.
Blended finance has emerged as a key channel to enable such transactions that fall outside the purview of conventional financing models, by combining concessional capital and credit enhancement mechanisms from public or philanthropic sources with commercial capital from banks and institutional investors.
The role of concessional capital and other credit enhancement tools is to absorb part of the downside risk through first-loss tranches, guarantees or subordinated debt. This improves the risk-return profile for senior tranches extended by commercial banks. For example, IFC’s blended finance programmes has supported sustainable forestry and land-use projects by providing risk-sharing mechanisms that crowd in private capital, while EIB has financed natural capital and water infrastructure projects using similar structures.
Guarantees help scale nature-positive finance by mitigating specific risks that are difficult for commercial lenders to absorb. These may include political risk, performance risk, technology risk, or revenue uncertainty linked to ecosystem outcomes. Partial credit guarantees or first-loss facilities can reduce expected loss for senior lenders and improve capital efficiency. This allows banks to extend longer tenors or offer more flexible repayment structures that align with ecological timelines of nature-based projects. For instance, ADB-supported programmes have used guarantees to support sustainable agriculture and water projects, enabling local banks to lend into sectors considered high risk.
Aside from blended finance, other mechanisms such as biodiversity and carbon credits are creating new revenue streams for nature-positive projects. While nascent, biodiversity credit markets aim to monetise ecosystem restoration and conservation outcomes, similar to how carbon credits monetise emissions reductions. Banks need to carefully assess the credibility, standardisation and liquidity of these markets with project developers, before relying on them as primary repayment sources. For example, forestry and land restoration projects financed by Triodos Bank or supported by IFC have combined timber revenue with carbon credit income, creating diversified cash flow that improve creditworthiness.
The linkage between carbon and nature markets is relevant for scaling finance. Many nature-positive projects, such as afforestation, mangrove restoration or regenerative agriculture, generate both carbon and biodiversity benefits. By integrating carbon credit revenues with ecosystem service valuation, projects can achieve stronger financial viability. Banks can recognise these multiple revenue streams in their financial models, while applying appropriate haircuts to account for market volatility and regulatory uncertainty.
Natural capital funds and specialised investment vehicles are emerging. These funds aggregate projects, diversify risk across geographies and sectors, and provide a platform for institutional investors to gain exposure to nature-positive assets. Examples include funds that focus on sustainable forestry, regenerative agriculture or water. For banks, participation in such funds as investors, arrangers or co-lenders, is a way to access diversified portfolios in place of concentrated exposure to individual projects.
For domestic banks looking to participate in nature-positive finance, they can participate in syndicated transactions alongside multilateral development banks and international financial institutions, leveraging their risk mitigation and due diligence capabilities. This allows local banks to build familiarity with nature-positive sectors while limiting exposure with shared risk. They can also develop sector-specific pipelines by working with clients in agriculture, forestry, infrastructure and real estate to identify projects that incorporate nature-positive elements, such as water efficiency, land restoration or sustainable sourcing. Last, they can actively structure risk mitigation layers within transactions through guarantees, blended finance or performance-linked mechanisms, to align project risk profiles with internal risk appetite.
That said, a lot depends on training relationship managers, product, risk and credit teams to identify opportunities, design appropriate instruments, and evaluate and monitor these exposures.
Examples show that scaling is already underway. IFC’s work in sustainable forestry and land-use finance has mobilised private capital through blended finance structures. EIB has financed large-scale water and ecosystem restoration projects aligned with environmental objectives. Banks such as HSBC and BNP Paribas have begun supporting sustainable agriculture and forestry value chains through lending, advisory and capital market activities. These provide proof of concept that nature-positive finance can be structured at scale when risk is appropriately shared.
In conclusion, scaling nature-positive finance requires a shift from transaction-level to portfolio-level capital mobilisation. Blended finance, guarantees, biodiversity and carbon markets, and natural capital funds together provide an ecosystem through which capital can flow into nature-positive sectors. As regulatory expectations and market demand for nature-positive outcomes increase, banks that develop these capabilities early will be better positioned to deploy capital efficiently while managing risks.
References:
ADB. (2021). Nature-based solutions for climate and disaster resilience in Asia and the Pacific. Asian Development Bank. https://www.adb.org/publications/nature-based-solutions-climate-disaster-resilience-asia-pacific
Blended Finance Taskforce. (2018). Better finance, better world. Business & Sustainable Development Commission. https://www.blendedfinance.earth/assets/Uploads/Better-Finance-Better-World.pdf
EIB. (2022). The EIB Group Climate Bank Roadmap 2021–2025: Supporting the European Green Deal. European Investment Bank. https://www.eib.org/en/publications/the-eib-group-climate-bank-roadmap
Global Impact Investing Network (GIIN). (2020). Financing conservation: A landscape assessment of an emerging market. GIIN. https://thegiin.org/research/publication/financing-conservation
IFC. (2021). Biodiversity finance: A guide for financial institutions. IFC. https://www.ifc.org/en/insights-reports/2021/biodiversity-finance
OECD. (2020). A comprehensive overview of global biodiversity finance. OECD. https://www.oecd.org/environment/resources/biodiversity/report-a-comprehensive-overview-of-global-biodiversity-finance.pdf
Taskforce on Nature-related Financial Disclosures. (2023). Recommendations of the Taskforce on Nature-related Financial Disclosures. TNFD. https://tnfd.global/publication/recommendations-of-the-taskforce-on-nature-related-financial-disclosures/
UNEP Finance Initiative. (2021). Financing nature: Closing the global biodiversity financing gap. UNEP. https://www.unep.org/resources/report/financing-nature-closing-global-biodiversity-financing-gap
World Bank. (2021). Mobilizing private finance for nature. World Bank. https://documents.worldbank.org/en/publication/documents-reports/documentdetail/099450006012234467/p1742890b3a2b30c90b0f0e0f9a1d0f5a2
World Economic Forum. (2022). Financing the transition to a nature-positive economy. World Economic Forum. https://www.weforum.org/reports/financing-the-transition-to-a-nature-positive-economy
