THE BLENDED FINANCE PLAYBOOK FOR NATURE-BASED SOLUTIONS
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THE BLENDED FINANCE PLAYBOOK FOR NATURE-BASED SOLUTIONS
THE BLENDED FINANCE PLAYBOOK
FOR NATURE-BASED SOLUTIONS
Content Earth Security develops innovative
programmes to link global finance to
nature’s capital.
1 Seeing nature as an asset 2 info@earthsecurity.org
in investment earthsecurity.org
2 Four types of blended 5 Sponsors
finance for nature Swiss Agency for Development and
Cooperation, HSBC, UBS Optimus
3 Recommendations: Growing a 14 Foundation.
blended finance portfolio
Disclaimer
Annex 18 The views and opinions expressed in this
Overview of blended finance report are only those of Earth Security.
vehicles for nature They do not imply any kind of endorsement
by its partners, funders or stakeholders
References 21 referenced.
Acknowledgements 22 Report Title
The Blended Finance Playbook
for Nature-Based Solutions
Publication date
June 2021
Copyright
© Earth Security 2021
Sponsors
We are grateful to the support
of our funding partners:
THE BLENDED FINANCE PLAYBOOK 1
FOR NATURE-BASED SOLUTIONS
INTRODUCTION
USING PUBLIC FINANCE TO MOBILISE PRIVATE CAPITAL
We are taking ecosystems The UN Environment Programme By contrast, nature’s ecosystem services
estimates that meeting climate change, are not yet fully recognised in the economy:
and biodiversity to the brink biodiversity and land degradation targets for example, the ability of a forest to
of collapse, understanding will require an investment of USD 8.1 help maintain a freshwater source is
very little about how this loss trillion in nature by 2050.1 Governments largely taken for granted by water users
are under growing pressure to increase downstream. The metrics and baselines,
undermines our future. funding to meet these targets, and are and monitoring and verification systems
Nature may be our ultimate increasingly aware that public finance are not fully developed. Blended finance
asset, but the investment alone will not be sufficient to achieve these tools have a critical role to play in helping
goals – much less to act on a planetary to move nature investments into the
markets that will enable scale. mainstream. But how?
investors to invest in precious
ecosystem services are still at Now time is running out. Public financing We identify 31 active investment vehicles
institutions, such as DFIs and donors, as (funds, facilities and bond instruments)
a very early stage. Innovative
well as philanthropic foundations, are which use blended finance as an approach
financing instruments are therefore increasingly interested in ways to drive the protection or restoration of
emerging to incentivise to use their balance sheets to attract nature’s ecosystem services, just 5% of
private investors or to build the capacity of the total blended finance vehicles at play
actors that benefit from
conservation projects to leverage private across investment sectors. Their combined
those services, be it carbon capital. fundraising target is just over USD 5.1
sequestration, freshwater billion. Yet the models offer important
practical insights into the opportunities to
availability or coastal flood
Enter blended finance grow this form of collaborative capital to
protection, to pay for their accelerate global impact.
conservation. Blended finance is an approach
that involves the use of public and
philanthropic funds to change the risk/ About this brief
return profile of investment projects
in order to attract the private sector. This brief is intended to provide government
According to Convergence, which holds agencies and philanthropic foundations
the world’s largest database of blended with a strategic view on how to use blended
finance transactions, over the past 15 finance to catalyse private sector capital
years some 600 transactions involving for nature-based solutions. It outlines the
blended finance have mobilised an models, trends and opportunities to use
aggregate USD 144 billion from public blended finance to shift their investment
and private sources. Sectors such as portfolios towards nature-positive results.
energy, infrastructure and financial
services represent the majority of these The analysis and conclusions build on a
transactions, where projects can service review of blended finance transactions
paying customers, generate revenues, that have reached at least the pilot stage
and clearly measure their social and and that focus wholly or primarily on
environmental impact alongside a nature-based solutions. These vehicles
financial return. were identified through an assessment
of transactions analysed by Convergence
across all sectors, case studies by the
Blended Finance Taskforce and instruments
endorsed by the Global Innovation Lab for
Climate Finance that have reached the pilot
stage. The analysis also draws on a series
of interviews and a workshop organised
by Earth Security with leading public and
private investors in these transactions
whose testimonials are featured here.
THE BLENDED FINANCE PLAYBOOK 2 FOR NATURE-BASED SOLUTIONS 1 SEEING NATURE AS AN ASSET IN INVESTMENT “ I see nature as a lens that impacts all asset classes, whether a public equity or a bond held by investors. Currently, the fact that a country having healthy seas or forests does not correlate with much else in an investor’s portfolio is a big opportunity to attract new investment capital.” Jennifer Pryce, President & CEO, Calvert Impact Capital
THE BLENDED FINANCE PLAYBOOK 3
FOR NATURE-BASED SOLUTIONS
Investors rarely think about Investors rarely think about the steady The potential of forests and other natural
cycles of freshwater flows, the healthy ecosystems to sequester carbon has caught
the steady cycles of freshwater oceans that provide abundant fish, the the attention of global companies and
flows, the healthy oceans rich soils that enable food production investors that are now racing to make good
that provide abundant fish, on land, or the regulation of surface on their ‘net-zero’ promises. Nature is the
temperatures that makes life possible, cheapest, fastest and most widely available
the rich soils that enable as valuable services they could invest solution to sequester carbon dioxide.
food production on land, or in. However, according to Swiss Re, the Land-use change is a fundamental driver
the regulation of surface reinsurance company, we are reaching a of greenhouse gas emissions, while land-
tipping point, as these systems struggle to based ecosystems such as forests, working
temperatures that makes life recover from the systematic degradation through established mechanisms such as
possible, as valuable services they are being subjected to. As many as a REDD+, present significant opportunities
they could invest in. fifth of countries worldwide are already to drive carbon sequestration.3 Nature
at risk from ecosystem collapse, as could provide over one-third of the carbon
their biodiversity declines to levels that sequestration needed to keep the planet’s
threaten life support systems.2 warming to below 2°C.4 However, the
rapid growth of nature-based carbon
Governments are under increasing sequestration projects around the world
political pressure to provide the is not without challenges. These include
financial means to protect natural ensuring the ‘permanence’ of forests given
ecosystems. Country obligations rampant deforestation rates, as well as the
under UN international conventions incentives to sustaining nature protection
on biological diversity (CBD), climate over the long term, among others.
change (UNFCCC) and desertification
(UNCCD) require countries to pursue Nature is more valuable than just its
domestic targets as well as, in the case carbon. As the report suggests, nature’s
of developed economies, to support services in sustaining freshwater cycles
developing countries with the financial and regulating temperatures can also be
means to implement the conventions. invested in once their value is recognised
The realisation that public finance alone and understood. For example, Earth
will not be enough to meet these goals is Security’s recent work on mangroves
creating a willingness to use public funds revealed that in addition to sequestering
catalytically to mobilise private capital. carbon up to 4 times faster than tropical
rainforests, mangrove forests provide a
The realisation that nature is a valuable cost-effective form of ‘green infrastructure’
THE INVESTMENT asset is sinking in. For example, investing for coastal protection. They help save an
VALUE OF NATURE in sovereign ‘nature’ bonds, which estimated USD 65 billion per year in avoided
THE CASE OF ZEPHYR incentivise the protection of a country’s losses due to extreme weather events.
POWER LIMITED natural capital alongside its economic
development, could be a strategic way for In Pakistan, Earth Security worked with
investors to diversify their fixed income CDC Group — the UK’s Development
portfolios. But investors looking for these Finance Institution (DFI) — to define the
deals will only find a handful of investment investment value of mangroves for a coastal
funds and experimental transactions, renewable energy investment project. The
which have taken years to develop and evidence suggests that mangroves will help
are the result of a collaborative effort of the project developer save an estimated
investors, NGOs and development finance USD 7 million in maintenance costs, while
institutions (DFIs). These opportunities — providing another USD 5 million in income
many featured here — are the early-stage to local communities that depend on shrimp
prototypes of a market that continues to farming, improving the project’s social
grow. The scarcities and risks arising from licence to operate.5 The DFI community
planetary boundaries on water, forests, has yet to consider the value that nature’s
soils, oceans, and other vital resources assets provide to their investment portfolios
Earth Security’s analysis with CDC will position these markets in an entirely and support their development impact.
Group has shown a 20-fold return on new light in the years to come.
investment from mangroves restoration
for coastal infrastructure.
THE BLENDED FINANCE PLAYBOOK 4
FOR NATURE-BASED SOLUTIONS
Earth Security has identified Our global programme is
the locations of key coastal working with cities around the
cities for the development world to develop this innovative
of ‘municipal mangrove bonds’ mechanism.
a scalable financing pathway
for capital markets to invest in
ecological assets globally.
Port Blair Andaman and Nicobar Islands
Port Moresby Papua New Guinea
Port Moresby Papua New Guinea
Puerto Princesa Philippines
Kerema Papua New Guinea
Delta Amacuro Venezuela
Cayenne French Guiana
Port Harcourt Nigeria
Bonthe Sierra Leone
Mongla Bangladesh
Sandakan Malaysia
Cumana Venezuela
Caripito Venezuela
Campeche Mexico
Kuching Malaysia
Limbe Cameroon
Myeik Myanmar
Sao Luis Brazil
Brass Nigeria
Amapá Brazil
Warri Nigeria
Belem Brazil
Miami USA
Guayaquil Ecuador
Tumaco Colombia
Libreville Gabon
Dumai Indonesia
Batam Indonesia
Sumatera Selatan Indonesia
Pangkal Pinang Indonesia
Singkawang Indonesia
Kalimantan Selatan Indonesia
Tarakan Indonesia
Balikpapan Indonesia
Kendari Indonesia
Kota Ambon Indonesia
Sorong Indonesia
Jayapura Indonesia
Brisbane Australia
Darwin Australia
The concept of ‘nature-based solutions’ As a result of climate change and According to the Coalition for Private
(NBS) is the latest effort to operationalise projected higher temperatures, high-value Investment in Conservation (CPIC) some
the role that ecosystem services play in Arabica coffee crops will need to move to of the barriers that private investors
social and economic development. The 300–500 metres above sea level in order to face when it comes to investing in
World Conservation Union (IUCN) defines adapt. This may be feasible for producers these solutions include the difficulty
NBS as ‘actions to protect, sustainably in Ethiopia and Kenya (though it may drive of generating attractive short-term
manage and restore natural or modified deforestation in higher-altitude areas), cashflows through nature conservation
ecosystems that address societal but will be difficult for market leaders and the timeframe it may take for projects
challenges effectively and adaptively, like Brazil.7 Investment funds that focus to become profitable. Many of these
simultaneously providing human well- on nature-based ‘shade-grown coffee’ investments are based in developing
being and biodiversity benefits.’ 6 NBS are hedging against climate risks in this countries, where political risks, weak
provide investors with a practical way to commodity. governance, and lack of creditworthiness
rethink how their assets and investment or local financial capacity may deter
portfolios incorporate the value of, and Other emerging investment opportunities investors.
work in partnership with, nature. focus on innovative financial instruments
that unlock capital to invest in nature’s Finally, designing these mechanisms and
The ‘holy grail’ of making NBS investable services. These involve bonds, insurance preparing them for the market is complex
is to find positive cashflows that emerge products, and ‘payment for ecosystem and both time- and resource-intensive.8
from protecting nature, providing a return services’ funds of various kinds. Most are The shortage of baseline data in many
on an investment. The easiest route for still at an early stage. One example is the developing countries means that the
investment is to invest in companies Forest Resilience Bond (FRB), which was impacts of these projects can be costly
whose business model work in balance created and piloted in California by Blue and difficult to measure, and in some
with nature. Think of a coffee-growing Forest Conservation. The FRB is a finance cases entirely new monitoring systems
company that operates a regenerative instrument that enables the US Forest are required.9 Where local monitoring
agriculture model, protecting local Service to restore forests, minimising capacity is limited, the need to invest in
forests and biodiversity alongside local the catastrophic risk of wildfires. The capacity-building will add to the upfront
livelihoods. In this case, crops cultivated cashflow that repays the bond for costs facing investors. The tools provided
under the canopy of trees benefit from a investors is provided by downstream by blended finance focus specifically on
richer biodiversity, which makes crops companies that benefit from the steadier removing many of these barriers.
more resilient to pests and able to supply of cleaner water and save on water
withstand rising temperatures. treatment costs.THE BLENDED FINANCE PLAYBOOK 5 FOR NATURE-BASED SOLUTIONS 2 FOUR TYPES OF BLENDED FINANCE FOR NATURE “ The DNA of blended finance is based on collaboration. It brings together government, private finance, philanthropic investors and corporates based on comparative advantages and relative risk tolerances. As a development bank, DFC has provided technical assistance, political risk insurance and partial credit guarantees to projects to improve the risk-return equation and incentivise the private sector to come in.” Jamie Cashman, Director, Investments, US International Development Finance Corporation
THE BLENDED FINANCE PLAYBOOK 6
FOR NATURE-BASED SOLUTIONS
Blended finance entails the Blended finance is best used in The vehicles are used to finance
transactions where the private sector sustainable forest management,
use of capital from public or would be willing to invest if the risk, real agroforestry and agriculture, and the
philanthropic sources to de- or perceived, were lower.11 Over the past sustainable management of coastal and
risk investments to attract 15 years, Convergence has identified marine ecosystems. They represent just
nearly 600 transactions, accounting for 5% of the overall universe of blended
the participation of the nearly USD 144 billion mobilised. As of finance transactions, with a combined
private sector for sustainable 2020, roughly half of all these deals have fundraising target of just over USD 5.1
development. According to been in the energy and financial services billion. This reflects the nascent stage
sectors — two sectors where blended of commercial investments that focus
Convergence, the preeminent finance is an effective approach. The other on nature protection, since blended
organisation promoting it, half of the deals consists primarily of finance requires NBS projects to have
blended finance is an approach investments in agriculture, infrastructure, a commercial element, and to deliver a
health and education.12 cashflow that can remunerate private
to structuring capital that investors.13
allows organizations with Earth Security has identified a total of
different objectives to invest 31 vehicles, including investment funds,
financing facilities and investment
alongside each other while
products, which (i) focus wholly or
achieving their own objectives, primarily on investing in ecosystem
whether financial return, conservation or restoration in a way
that captures economic value, and (ii)
social and environmental
incorporate a blended finance approach of
impact, or a blend of both.10 using public funds catalytically to attract
private capital (see Annex).
“ We see that fund managers need more
than grants in order to innovate. GEF is
supporting transactions in challenging
environmental areas by taking a first loss
position or an anchor investor role and by
providing equity, debt or guarantees that
help achieve necessary risk/return profile
to mobilize additional investment and attract
necessary coalitions of investors.”
Avril Benchimol Dominguez, Senior Finance Specialist
Global Environment Facility (GEF)THE BLENDED FINANCE PLAYBOOK 7
FOR NATURE-BASED SOLUTIONS
THE BLENDED FINANCE PLAYBOOK
FOR NATURE-BASED SOLUTIONS
We identify four main modes of blended Importantly, blended finance is not merely The main public finance and philanthropic
finance for nature. These provide a the presence of public/philanthropic actors that have provided blended
range of options for layering capital and commercial capital in the same finance for nature-based transactions
to incentivise investment in nature- transaction, but rather the strategic use can be grouped into the following three
based solutions. Often, blended finance of risk-tolerant capital from public and categories:
vehicles will combine many of these philanthropic sources to de-risk and — Philanthropic Foundations.
modes in one transaction, depending attract larger sums of capital available — Donors and Multi-donor Funds.
on the needs and complexity of the from private finance. — Development Finance Institutions
investment.14 (DFIs).
Blended Finance Types
and Likely Providers
Philanthropic Donors and Development
Foundations Multi-donor Funds Finance Institutions
Type 1
Design and
Preparation Funds
Type 2
Technical
Assistance Funds
Type 3
Guarantees and
Risk Insurance
Type 4
Concessional
Finance
Leaders Bloomberg Philanthropies Agence Française de Asian Development Bank
The organisations that Convergence (grant windows) Développement Dutch Entrepreneurial
have been active in these David and Lucile Packard Dutch Ministry of Development Bank – FMO
types of transaction Foundation Foreign Affairs Inter-American Development
Global Innovation Lab for European Union Bank
Climate Finance Global Environment Facility KfW
(philanthropy collaborative) Green Climate Fund European Investment Bank
Gordon and Betty Moore USAID US International Development
Foundation Finance Corporation
MacArthur Foundation The World Bank
Paul G. Allen Family Foundation
Prince Albert II of Monaco
Foundation
The Rockefeller FoundationTHE BLENDED FINANCE PLAYBOOK 8
FOR NATURE-BASED SOLUTIONS
BLENDING TYPES
Type 1
Design and Preparation Funds
Description Case study
The Cloud Forest Blue Energy Mechanism
Grant funding for the As cloud forests are rapidly depleted The Climate Finance Lab — a philanthropy
around the world, the loss of their collective — provided the design-stage
design or preparation of a ecosystem services, such as water grants to develop the model. Patient
transaction, to improve the regulation, poses a significant risk to capital will be needed to offset the fact
viability and bankability of a water-intensive assets. that the offtake agreement will not begin
to yield returns until the project has been
project or enterprise to reach The Cloud Forest Blue Energy Mechanism running for 3–5 years. In the first stage of
financial close. Design-stage aims to mobilise commercial finance the project, USD 1 million in grant funding
grants are used to support the from hydropower companies to from FMO, Global Environment Facility
restore and protect cloud forests in and Conservation International will fund
proof of concept, establish a Latin America as a way to ensure the research and development to prove the
baseline and a monitoring and availability and resilience of their water model.16 Subsequently, up to USD 30
verification system, develop a supplies. Debt and equity is mobilised million in blended public and private
from domestic commercial investors finance will be mobilised to de-risk private
pipeline and provide the pre-
into a Special Purpose Vehicle, which sector investment. The aim is for the
commercial funding needed pays implementation partners for the mechanism to be replicated on a purely
in the initial stages of an restoration and conservation of cloud commercial basis from 2026 onwards. If
forest ecosystems. The repayment to successful, the Cloud Forest Blue Energy
investment thesis or vehicle.
investors is provided by hydropower Mechanism could provide the blueprint
Instruments may include companies via an off-take agreement for and business case for combining payment
grants or convertible grants the delivery of ecosystem services — in for ecosystem models and pay-for-
this case, a reduction in sedimentation success financing mechanisms to deliver
(including the Right of First
load in reservoirs. This reduces their nature-based solutions in other markets.17
Refusal for investors). water treatment costs and can prolong
the lifetime of hydropower assets by https://www.climatefinancelab.org/
an estimated 10 years. The payment of project/cloud-forest-blue-energy-
hydropower companies is dependent on mechanism
the successful delivery of reductions
in sedimentation (after 3–5 years) as a
results-based financing model.15
Likely providers
Philanthropic
FoundationsTHE BLENDED FINANCE PLAYBOOK 9
FOR NATURE-BASED SOLUTIONS
Type 2
Technical Assistance Funds
Description Case study
The Land Degradation Neutrality Fund
Technical assistance grants An estimated 75% of the earth’s land Concessional finance has been provided
area is already degraded.18 In order to by the European Investment Bank,
are used to build the technical combat this, the UN Convention to Combat Fondation de France, and the Government
capacity of investees and of Desertification and fund manager Mirova of Luxembourg. Grants for technical
key stakeholders such as Natural Capital created the world’s first assistance were provided by Agence
investment fund dedicated to preventing Française de Développement (AFD) and
local communities that may soil degradation — the Land Degradation the Global Environment Facility (GEF).
be crucial to the successful Neutrality (LDN) Fund.
implementation and The layered structure allows the LDN
The fund is a blended finance vehicle Fund to offer different risk-return
ultimately the commercial investing in projects that promote profiles for different investors, with
viability of projects. They sustainable land management and the the junior tranche (funded using public
can also be used to build rehabilitation of degraded land through and philanthropic funds) de-risking the
investments in sustainable agriculture more senior tranches and incentivising
capacity in other areas such
and forestry among other land-use private investment.20 The use of blended
as financial management, sectors. The target size of the fund is finance also facilitates the provision of
contracting, business model USD 300 million, with investment from technical assistance, longer repayment
senior investors (70% of the total) who are periods and repayment grace periods,
development, or impact
aiming for commercial returns, as well as which are necessary due to the long
monitoring and evaluation. junior investors (30%) who are providing time horizon over which many land
These grants for technical concessional capital. 20–30% of the USD rehabilitation and forestry projects take
300 million raised will be first-loss capital, place and the significant gap between
assistance can be often
most of it from public investors. At the initial investments and the first cashflows
provided by donors through project level, the fund takes a mezzanine generated by projects.21 22 The fund aims
a dedicated fund running in position, with the aim of attracting to show private investors the potential of
parallel to an investment additional commercial funding to scale investing in natural capital, catalysing new
up promising projects.19 Private investors investment.23
vehicle. include Fondaction, BNP Paribas Cardif,
and Garance. https://www.cbd.int/financial/un/unccd-
ldnfund2017.pdf
Likely providers
Donors and
Multi-donor FundsTHE BLENDED FINANCE PLAYBOOK 10
FOR NATURE-BASED SOLUTIONS
Type 3
Guarantees and Risk Insurance
Description Case study
The Seychelles Blue Bond
Risk guarantees protect In 2018, the Seychelles issued the world’s The World Bank (IBRD) issued a
first sovereign blue bond, with the aim of repayment guarantee worth USD 5 million,
investors against losses, as financing sustainable fisheries and marine while the Global Environment Facility
part of a capital structure. protection. The bond raised USD 15 million (GEF) provided USD 5 million as a non-
This de-risks projects that from international investors with USD 5 grant instrument, which offers a 40-year
million purchased privately by each of maturity period at a fixed interest rate of
are initially perceived to be three impact investors in the USA: Calvert 0.25%, with a 10-year grace period.
too risky by private investors. Impact Capital, Nuveen, and Prudential.
The guarantor will agree Without these support mechanisms,
The bond demonstrated the potential for the interest rate on the bond could have
to cover the loss (in full countries to harness capital markets for been as high as 8%, given the Seychelles’
or in part) of a third-party financing the sustainable use of marine small tax base, low credit rating and
financing transaction in the resources.24 Of this, USD 12 million is previous history of defaulting on sovereign
earmarked for the Bank of Seychelles- obligations in 2008. As it stands, the rate
case of non-repayment or
controlled Blue Investment Fund, which of interest is 2–3%.26 The Seychelles Blue
loss of value. Guarantees will be used to invest in projects that will Bond marks an important step forward in
allow transactions to attract deliver financial returns to investors. The the field of financing for nature in that it
remaining USD 3 million is earmarked tested and demonstrated the willingness
capital at more favourable
for the Blue Grants Fund, controlled by of private donors to step in at a sovereign
rates. Other risk mitigation the Seychelles Conservation and Climate level to offset government debt in pursuit
instruments such as political Adaptation Trust (SEYCCAT). of conservation-related goals.27
risk insurance play a similar
Projects funded by SEYCCAT are not https://www.worldbank.org/en/news/
role. expected to deliver financial returns.25 press-release/2018/10/29/seychelles-
The government of the Seychelles will be launches-worlds-first-sovereign-blue-
responsible for repaying the debt. Blended bond
finance was instrumental in reducing the
risk of default and keeping the interest
rate manageable.
Likely providers
Donors and Development
Multi-donor Funds Finance InstitutionsTHE BLENDED FINANCE PLAYBOOK 11
FOR NATURE-BASED SOLUTIONS
Type 4
Concessional Finance
Description Case study
The Forest Resilience Bond
Concessional finance is In California, where one in three homes Fund manager Blue Forest Conservation
is at risk of wildfire, the funding gap aims to issue additional bonds and
provided by public entities for improving forest management and mobilise enough capital to fund projects in
on more favourable terms in reducing wildfire risks is estimated at the USD 10–25 million range.
order to mobilise commercial USD 6 billion.28 The Forest Resilience
Bond (FRB) aims to help bridge this gap The FRB relies on a cashflow provided
capital. Debt or equity at by mobilising investments from private by beneficiaries of the forest ecosystem
below-market rates helps and philanthropic capital to finance forest services, including the Water Agency and
to lower the overall cost of restoration activities at a greater speed the water utility company, which share
and scale across the western United the costs of reimbursing investors over
capital and mobilise finance States.29 time. These are fixed cost-share payments
from more risk-averse based on project outcomes, which include
investors. This includes The Yuba Project was created in 2018 as avoided fire risks, improved water quality
a collaboration between fund manager and reduced sedimentation, and water
accepting subordinate or quantities. Contracted payments to
Blue Forest Conservation, Tahoe National
junior terms (first-loss or Forest, the Yuba Water Agency and the investors will be made for up to 10 years,
junior equity) compared National Forest Foundation. The project in line with the timing of benefits expected.
mobilised USD 4 million from private and
to other co-investors.
philanthropic sources via the issuance The FRB model is innovative in that it
Concessional loans can also of a bond to protect 15,000 ha of the takes a systemic approach to forest health
effectively reduce the overall Tahoe National Forest from wildfire risk. and ecosystem services, making use of the
Early-stage design grants were provided expertise and resources from a range of
interest rate of financing
by The Rockefeller Foundation and the public and private stakeholders. Another
if other lenders provide Gordon and Betty Moore Foundation to defining aspect of the FRB is its ability
market-rate loans, thereby enable the development of the model to raise private capital to fund the full
improving the affordability including stakeholder collaboration. cost of restoration upfront, meaning that
The foundations additionally committed restoration activities can be implemented
of finance to the investee. concessional debt at below market rates, immediately.30
Concessional capital can also enabling private investors Calvert Impact
be provided conditional on Capital and CSAA Insurance Group to https://www.blueforest.org/forest-
invest in the bond at a higher rate. resilience-bond
a pre-agreed set of results
(‘impact-linked loans’ or
‘results-based financing’),
which provide investors with Likely providers
the assurance that financing
will be effectively tied to
its intended ecological and
social impact.
Philanthropic Donors and Development
Foundations Multi-donor Funds Finance InstitutionsTHE BLENDED FINANCE PLAYBOOK 12
FOR NATURE-BASED SOLUTIONS
KEY INSIGHTS
Insight 1 Insight 2
Design-stage grants play an important role in Technical assistance grants offer government
nature-related transactions. This is because donors a way to participate in blended
NBS solutions benefit more from a discovery finance by using non-commercial grants
phase, as their markets and solutions are less for development impact, while also helping
developed. kick-start market models and an enabling
environment for private investment in
environmental goods.
Design-stage grants from This funding is frequently Implementing most NBS In addition, technical assistance
public and philanthropic provided through dedicated projects requires the active grants can enable the
donors play a fundamental ‘accelerators’ such as work of local stakeholders participation of a larger range
role in helping early-stage Convergence Design Funding, such as local NGOs, small of funders, such as government
NBS mechanisms to become the Global Innovation Lab for businesses, local communities, donor agencies, which may
bankable.31 This up-front Climate Finance, the Blue small-scale farmers and not have the fiduciary mandate
finance is especially important Natural Capital Financing artisanal fishers, who often to get involved in commercial
in NBS where the early- Facility, and the TNC Natural require training in technical, transactions. Setting up
stage research requirements Climate Solutions Accelerator, business or financial skills.34 technical assistance facilities
are high: baseline data and which provide design-stage outside commercial vehicles
systems to track impacts may funding to promising projects Building the capacity of these and focussing on building
be lacking, business models but do not offer additional stakeholders can in turn be local capacities with clear
may require proof of concept, forms of capital.33 vital to the viability of an NBS development objectives provides
and investment structures investment. Grant funding can a route for donors to help
may need to be developed and In the case of the Forest help fund the development of support these transactions.
proven. Design-stage grants Resilience Bond, where it was necessary data and baselines
are likely to be a critical part determined that an innovative and the skills training to ensure In the case of the Land
of growing the blended finance model was needed, early- that recipients of funding Degradation Neutrality Fund,
market for nature-based stage grant funding provided are equipped to implement grant funding from AFD and
solutions.32 the resources needed to carry projects effectively. Grant- the GEF supported training in
out the economic analysis based technical assistance is technical skills for sustainable
needed to develop the model also critical to improve impact forestry and regenerative
and prove its viability as well measurement, reporting and agriculture projects, as well as
as to engage a diverse range of transparency – often cost the development of baselines
public and private stakeholders requirements that can reduce that will be used to measure and
to maximise stakeholder buy-in the commercial viability of demonstrate positive impact,
and their contribution to the enterprises operating in which will in turn encourage
model’s chances of success. nascent markets.35 more investors to increase their
exposure to investing in NBS.36THE BLENDED FINANCE PLAYBOOK 13
FOR NATURE-BASED SOLUTIONS
Insight 3 Insight 4
Concessional capital, the most commonly Results-based finance can help strengthen
used mode of blended finance for nature, can blended transactions, by providing greater
improve the rate of return for investors, while confidence in particular to public investors and
risk guarantees will help NBS projects become donors that their support for blended finance
bankable. transactions for nature will have a strong
outcome focus.
The case of the Forest In the case of the Seychelles While impact bonds and other Under the terms of the bond,
Resilience Bond demonstrates Blue Bond, the USD 5 million forms of ‘payment for results’ investors will not receive
that concessional capital does repayment guarantee provided have been widely used in the an annual coupon payment.
not need to be subordinate by the World Bank helped social impact space, meaning Instead, they will be repaid
to be catalytic. While all four reduce the risk of government that they are familiar to impact their original capital once
investors invested the same default on repayment investors, results-based the bond matures — plus an
amount, the two concessional obligations, reducing the financing is at a very early additional payout depending
investors accepted a lower interest rate on the bond and stage when it comes to blended on whether or not rhino
interest rate, which allowed for providing investors with peace finance for NBS.40 population targets have been
an affordable rate of repayment of mind. met, allowing them to make a
and attractive commercial Two new vehicles to be taken to profit. The cost of the additional
returns for the two commercial Guarantees have played an market in 2021 — the Wildlife results-based payout will be
investors.37 The high risks (both instrumental role in credit- Conservation Bond and the funded by the GEF.41
real and perceived) associated enhancing bonds: 67% of the Cloud Forest Blue Energy
with NBS investments make blended finance transactions Mechanism — will likely have a Environmental Impact Bonds
the use of risk guarantees or that were bonds launched broader demonstration effect (EIBs) are only just emerging
first-loss capital a critical way between 2017–2019 used on the value of using results- in this space but are seen as
of improving the bankability guarantees or risk insurance, based financing in blended an important results-based
of projects.38 In addition to increasing their likelihood of finance transactions as an finance instrument to scale
first-loss, guarantees can be achieving investment-grade investor confidence-building nature-based solutions with
tailored to mitigate the specific ratings, which is a requirement measure. In the case of the sound impact measurement
risks that may impede private of most institutional Wildlife Conservation Bond, at the core. A newly launched
investments, particularly in investors.39 the World Bank is creating a Global Fund for Coral Reefs
developing countries. structured bond that will raise is also exploring results-
finance from private investors based financing options as an
for rhino conservation activities attractive way of paying for
in two nature reserves in South tangible conservation results.42
Africa.THE BLENDED FINANCE PLAYBOOK 14 FOR NATURE-BASED SOLUTIONS 3 RECOMMENDATIONS GROWING A BLENDED FINANCE PORTFOLIO “ Coming in at an early stage, foundations can help to set up, catalyse and unlock high-potential markets for nature-based solutions. The support of foundations has shown to be a critical enabler of new models and increasing the comfort levels of commercial investors in the early stages of this market. They must be comfortable with a long and risky timeline to success.” Adam Connaker, Director of Innovative Finance, The Rockefeller Foundation
THE BLENDED FINANCE PLAYBOOK 15
FOR NATURE-BASED SOLUTIONS
Recommendation 1 Initiatives that can increase investor Recommendation 2
education on NBS are also needed, helping
All together now translate how to build nature-positive
Public finance institutions
portfolios through day-to-day investment
Blended finance for nature is ultimately decision-making. In particular, on the Public finance institutions, including
about the catalytic use of public funds to private investor side, it is necessary to go government donors, DFIs and sovereign
increase the ‘bankability’ of nature-based beyond the small group of impact investors funds have demonstrated the critical
solutions by private investors, and create involved, and activate the engagement of role they can play in providing the grant
markets that fully recognise natural long-term capital – especially through funding and concessional capital needed
capital as underpinning the viability of pension funds and insurance companies. to kick-start and accelerate the market for
economic investments. An important This will require identifying the type of investing in nature-based solutions.
task is therefore to engage public finance products and mechanisms that fit within However, our analysis of the majority of
institutions to provide de-risking capital on their portfolios, helping organisations that blended finance transactions for nature
a bigger scale. are creating new nature-based financing over the last ten years reveals a rather
concepts to design them for scale and small pool of the same public finance
A range of public entities, from DFIs to attract larger investment ticket sizes. institutions engaged in supporting the
multilateral funds, are demonstrating same deals.43 Widening the pool of donors,
that it is possible to use their balance Long-term investors such as pension funds DFIs and other public financing entities is
sheets to guarantee investors or provide and insurance companies will be uniquely vital for this market to grow.
other forms of support such as technical positioned to consider using their balance
assistance, and to do so in line with their sheets to support the growth of NBS The linkages of NBS as a conduit for
public development mandate. Growing the investments that need longer timeframes climate finance (i.e., seeing nature as a
share of public, private and philanthropic of maturity, if this is done in tandem with cost-effective climate solution) is expected
investors that are unlocking finance for a growing participation of de-risking to be one of the drivers through which
nature will require going beyond individual guarantees provided by public finance public finance institutions — DFIs and
transactions. Market-building efforts must institutions. donors — increase their willingness to
focus on facilitating access to baseline consider NBS investments. For example,
assessments, monitoring and verification Finally, there are simply not enough the UK government, in its drive to increase
systems to provide a wide market deals on the table. Identifying, designing climate finance strategically as the
infrastructure. and supporting programmes and host of COP26 in 2021, has committed
mechanisms that can better articulate GBP 3 billion to NBS over the next five
the market information and interests of years, which is intended to support the
these investment sectors, to come into development of a larger global pipeline of
contact with one another, understand NBS projects.44
mutual opportunities, and connect around
transactions, themes and regions of
interest. A suite of market-building efforts
is an important vector of growth for the
future of blended finance transactions for
nature.THE BLENDED FINANCE PLAYBOOK 16
FOR NATURE-BASED SOLUTIONS
Actions for public institutions include: — Government donors and multi-donor Recommendation 3
funds: A key factor in engaging donors
— Development Finance Institutions: and donor funds with blended finance
Philanthropic foundations
DFIs, including multilateral development deals for nature will be whether their
banks, must increase the budget lines mandates allow the use of taxpayer Philanthropic funding represents a
available for risk-taking concessional funding as part of commercial relatively small pool of funds in blended
capital to support NBS investments. investment vehicles. If this is not the finance transactions for nature, in
They can do so via a range of de-risking case (or if the internal agency expertise comparison to government funds. However,
capital instruments, including risk or buy-in is not there yet), the majority a group of US-based foundations have had
guarantees or first-loss investments. of donor agencies and funds will still an outsized impact in the development of
Increasing their portfolio allocation be able to set up technical assistance this nascent investment space.
to these instruments may require grants and technical assistance
new investment windows, but just as facilities, which build the capacity of Foundations often play a strategic role by
important will be to develop the internal local organisations and allow them to providing early-stage research grants, and
understanding and buy-in from senior participate and benefit from market design-stage blueprints and pilots, that
management of the opportunities for mechanisms. That these technical support the formative stages of innovative
their DFIs to use NBS as a strategy for assistance grants are provided finance transactions and instruments to
sustainable growth in their regions that separately and through a facility that reach an investment closing stage. This
also makes investment sense. This can operates outside (but in coordination is the case of philanthropy collectives
best be done by focusing on thematic with) the commercial investment such as the Climate Finance Lab and
investment opportunities that are most vehicle, provides donors with a safe the philanthropic funding windows of
relevant in their regions, and helping space for experimentation, in aligning Convergence. Philanthropic foundations
DFIs identify how to increase their grants and capacity building that they are a key early-stage stakeholder, and
exposure to NBS deals in a way that is would fund anyway more strategically are involved in over half of all the blended
regionally specific. DFIs do not always with investment mechanisms that can finance deals for nature in the market.
need to come into an investment with a leverage and attract the private sector.
higher risk-taking profile than private For those multilateral funds that do There are only a very few examples of
investors, as there will be opportunities have the mandate and expertise to foundations participating as investors in
to invest in NBS where DFIs can do so on use their funds catalytically as part blended finance transactions for NBS.
equal terms to private investors.45 of blended finance, the model of the These include the David and Lucile
Global Environment Facility’s (GEF) Packard Foundation and MacArthur
participation in blended finance deals Foundation as investors of junior equity
deploying a range of instruments into the Terra Silva investment vehicle, and
provides a template for action. However, The Rockefeller Foundation and Gordon
acting through multilateral funds that and Betty Moore Foundation capital
focus on blended finance, such as investments in the Forest Resilience Bond
the GEF, governments can contribute in California.
to strengthen a global response and
pipeline to finance NBS, in alignment Foundations at the forefront of pioneering
with key global frameworks and blended finance for NBS transactions have
conventions such as CBD and UNFCCC. been willing to accept the possibility of
failure that comes with testing and piloting
creative solutions. They have also been
willing to invest in building the market
architecture, by supporting research into
opportunities that can educate investors
and build buy-in among other types of
public and private investors.
Philanthropists (foundations, high-net
worth individuals and family offices) have
a critical role to play in diversifying and
growing the market of blended finance
investments for nature, whether through
catalytic grants, or ‘impact-first’ high-risk
investments.46
CaptionTHE BLENDED FINANCE PLAYBOOK 17
FOR NATURE-BASED SOLUTIONS
Actions for public institutions include: Recommendation 4 Increasing the exposure of private
investors to these deals will require a
— For foundations not yet involved,
Private investors clearer communication of the positive
and philanthropy advisors: For all its investment performance of these
potential, the universe of foundations While private capital is present in over instruments. More transparency on their
involved in these transactions is rather half of the transactions reviewed, the impact will be also needed, in particular
small. Hundreds more foundations number of private investors active in this to support results-based financing options
can have an outsized impact in this space is small. A handful of pioneering that can link finance to a positive increase
space, using the template already fund managers and impact investors in ecosystem services. Finally, a critical
developed by leading foundations in have led the advancement of blended barrier for institutional investors such
these transactions. They can do so by finance transactions for nature-based as pension funds will be the size of the
participating in philanthropy collectives, solutions. In particular, impact investors transactions. This will be a challenge
which has the benefit of providing such as Calvert Impact Capital have for specific investment products, where
foundations still at an early stage of taken investment positions in a range of aggregation of products into larger
the learning curve with a pipeline of innovative transactions, bringing market investment options will be increasingly
projects and the advice of experienced rate capital to innovative investments. important for these opportunities to be
foundations. Alternatively, they can distributed to investors, and for this sector
engage directly with a range of NGOs A small number of global banks have acted to grow in scale.
and other actors developing these deals. as lead managers or placement agents
More support and guidance is needed, for these transactions, bringing their
including from philanthropy advisors core skills and expertise to develop the
who themselves need to build their market. They too have a facilitation role to
knowledge and advisory capacity on play in exploring how to accelerate their
what foundations and philanthropists support for NBS as part of their portfolios
can do to use their capital more and investment activities, in tandem with
catalytically to support the early-stage creating more interest from institutional
development of blended finance for investors and asset owners.
nature.
One route to accelerate change is to
— For foundations already involved in educate investors about the opportunity
blended finance: These foundations are to invest in nature-based solutions,
already at the forefront of this agenda. encouraging them to advocate with
However, the experience of a handful financial advisors for more exposure to
of US-based foundations shows that these kinds of deals. Pension funds and
there are growing possibilities to use insurance companies are uniquely placed
philanthropic grants, including through to embrace nature-based deals, since the
programme-related investments that longer time frame of these opportunities
can play a catalytic role. For instance, is better aligned with their capital,
this can be done by providing convertible alongside a growing participation of public
grants or taking junior positions in finance institutions contributing to de-risk
financing instruments or funds. A transactions, for example through first-
closer coordination between grants loss guarantees.
provided for the early stages of blended
finance transactions, with commercial
positions, through programme-related
investments, will continue to develop the
blended finance playbook for nature-
based solutions, and increase the
leverage that foundations can deliver
together with innovative grant capital.THE BLENDED FINANCE PLAYBOOK 18
FOR NATURE-BASED SOLUTIONS
ANNEX
OVERVIEW OF BLENDED FINANCE VEHICLES FOR NATURE
In carrying out this analysis, Earth 1 Funds Sources
Security identified and reviewed a A fund is a pool of capital from many
total of 31 investment vehicles which sources. Funds can be layered to The vehicles were identified through a
have reached at least a pilot stage and distribute risks and returns differently review of existing databases of blended
which have mobilised blended finance to commercial and concessional finance including Convergence, the Global
in some way to fund nature-based investors. Innovation Lab for Climate Finance (only
solutions. The list excludes investment vehicles at the pilot/replication stage),
vehicles that may be at a concept stage, the Blended Finance Taskforce, as well
as well as those which leverage public 2 Facilities as the Global Environment Facility (GEF)’s
and private finance but do not take a A facility is an earmarked allocation of resources on blended finance. They are
blended finance approach of deploying public (and sometimes philanthropic) not intended to provide an exhaustive list
public capital to de-risk private funding, which can invest in projects of all such transactions and are based only
investment. The vehicles reviewed fall with the aim of attracting commercial on publicly disclosed information.
into three categories: investment to those same projects.
3 Bonds
A bond is a fixed-income product
representing a loan made by an investor
to a borrower. Bonds are frequently
used by governments to finance
projects.
Name Instrument Ecosystem Blended Finance Target
or Vehicle Impact
Type 1 Type 2 Type 3 Type 4 USD million
&Green Fund Fund Forests Technical Concessional 400
Assistance Finance
Funds
Africa Forest Fund Forests Technical Concessional 300
Carbon Catalyst Assistance Finance
Funds
Agri3 Fund Fund Forests Technical Guarantee Concessional 205
Assistance and Risk Finance
Funds Insurance
Althelia Fund Forests Guarantee Concessional 100
Biodiversity and Risk Finance
Fund Brazil Insurance
Althelia Fund Forests Technical Guarantee Concessional 120
Climate Funds Assistance and Risk Finance
Funds Insurance
Arbaro Fund Fund Forests Concessional 110
Finance
Caapora Fund Forests Technical Concessional 18.1
Socio-Climate Assistance Finance
Benefits Fund Funds
Continues on next pageTHE BLENDED FINANCE PLAYBOOK 19
FOR NATURE-BASED SOLUTIONS
Name Instrument Ecosystem Blended Finance Target
or Vehicle Impact
Type 1 Type 2 Type 3 Type 4 USD million
Cloud Forest Fund Forests Design and 30
Blue Energy Preparation
Mechanism Funds
DC Water EIB Bond Rivers and Concessional 25
Riparian Finance
Eco.business Fund Multiple Technical Concessional 383
Fund Assistance Finance
Funds
Forestry and Fund Forests Technical Concessional 15–20
Climate Change Assistance Finance
Fund (FCCF) Funds
Forest Resilience Bond Forests Design and Concessional 8.3
Bond Preparation Finance
Funds
Global Fund for Fund Coastal and Technical Guarantee Concessional 500
Coral Reefs Marine Assistance and Risk Finance
Funds Insurance
Land Degradation Fund Multiple Technical Concessional 300
Neutrality Fund Assistance Finance
Funds
Livelihoods Fund Forests Technical Guarantee Concessional 109
Carbon Fund 3 Assistance and Risk Finance
Funds Insurance
Meloy Fund for Fund Coastal and Technical Concessional 22
Sustainable Com- Marine Assistance Finance
munity Fisheries Funds
Mobilising Fund Forests Guarantee Concessional 212
Forests for and Risk Finance
Finance (MFF) Insurance
Moringa Fund Fund Forests Technical Concessional 103
Assistance Finance
Funds
Nature+ Fund Multiple Technical Concessional 200
Accelerator Assistance Finance
Funds
Responsible Facility Forests Guarantee Concessional 339
Commodities and Risk Finance
Facility Insurance
Continues on next pageTHE BLENDED FINANCE PLAYBOOK 20
FOR NATURE-BASED SOLUTIONS
Name Instrument Ecosystem Blended Finance Target
or Vehicle Impact
Type 1 Type 2 Type 3 Type 4 USD million
Restoration Facility Forests Concessional 30
Seed Capital Finance
Facility
Seychelles Bond Coastal and Guarantee Concessional 15
Blue Bond Marine and Risk Finance
Insurance
Seychelles Fund Coastal and Concessional 21.6
Debt-for-Nature Marine Finance
Swap
Smallholder Fund Forests Technical Guarantee Concessional 51
Forestry Vehicle Assistance and Risk Finance
Funds Insurance
Sustainable Fund Coastal and Guarantee Concessional 132
Ocean Fund Marine and Risk Finance
Insurance
Terra Bella Fund Forests Technical Concessional 100
Colombia Fund Assistance Finance
Funds
Terra Silva Fund Forests Concessional 90
Finance
Tropical Asia Fund Forests Concessional 300
Forest Fund 2 Finance
(TAFF 2)
Tropical Facility Forests Technical Guarantee Concessional 350
Landscape Assistance and Risk Finance
Finance Facility Funds Insurance
Wildlife Bond Wildlife Concessional 45
Conservation Conservation Finance
Bond
Working Forest Fund Forests Concessional 500
Fund Finance
Total Target 5,139THE BLENDED FINANCE PLAYBOOK 21
FOR NATURE-BASED SOLUTIONS
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