Nature-Based Solutions: The Next Big ESG Investment Theme

As financial institutions navigate an increasingly complex ESG landscape, a pivotal realization is taking hold: nature offers not just resilience, but a powerful and investable solution. The strategic imperative of Nature-Based Solutions (NbS) is shifting from an ethical ‘nice-to-have’ to a market-shaping ‘must-have’, demanding a strategic focus on intelligent, scalable investment.

Nature is emerging as a powerful, investable asset class in the evolving world of sustainable finance. NbS – such as carbon-sequestering forests, flood-buffering wetlands, biodiverse coral reefs, and regenerative farmlands – are no longer peripheral elements of sustainability strategies. They are becoming a core pillar of ESG investment portfolios. This transition is financial and strategic.

Nature-based solutions (NbS) refer to actions that leverage natural ecosystems to address societal and environmental challenges like climate change, biodiversity loss, and disaster risk, while also supporting human well-being and generating economic value. In the ESG (Environmental, Social, Governance) context, NbS contribute to a wide range of outcomes: enhancing biodiversity, supporting community livelihoods, improving ecosystem services like water filtration and soil regeneration, and supporting climate-related goals like mitigation and adaptation.

These include large-scale ecosystem restoration, regenerative agriculture, and green infrastructure in urban areas. Blue carbon initiatives like mangrove protection and seagrass cultivation not only help sequester CO₂ in coastal systems but also enhance biodiversity and protect marine habitats, underscoring that the environmental pillar of ESG extends beyond just climate and carbon.

The Nature Conservancy estimates that NbS could contribute over one-third of the climate mitigation potential required by 2030 to meet the Paris Agreement targets. Yet currently, they receive just 3% of global climate finance, according to the UN.¹

That is rapidly changing. According to the 2023 Global NbS Investment Report, private sector investment in NbS has tripled since 2020, with blended public-private financing also gaining traction. For financial institutions, nature-based solutions are moving from peripheral sustainability initiatives to strategic ESG investments, driven by measurable returns and increasing policy alignment. Ignoring this rapidly maturing asset class is no longer an option for institutions focused on long-term value creation and risk mitigation.

NbS encompass a wide range of ecosystem-based interventions:

• Ecosystem restoration: Initiatives such as rewilding or wetland rehabilitation that restore ecological function.
• Regenerative agriculture: Farming practices that improve soil health, increase carbon sequestration, and enhance long-term yields.
• Green infrastructure: Urban interventions like green roofs and sponge cities that buffer heat and water stress.
• Blue carbon: Protection and restoration of coastal ecosystems (mangroves, salt marshes, and seagrasses), which act as carbon sinks and boost biodiversity.

These initiatives generate measurable environmental and social returns, such as carbon credits, biodiversity enhancements, water purification, and employment opportunities.

Indigenous peoples steward over 80% of the world’s remaining biodiversity². Their involvement in NbS is not optional but essential. Projects that lack genuine community participation often face challenges such as land disputes, ecological mismatch, or limited long-term impact.

From the Yurok Tribe restoring salmon habitats in California to Indigenous-led carbon offset programmes in the Amazon, co-designed NbS projects demonstrate higher resilience and stronger outcomes. It is important to understand that true nature-positive impact is inseparable from social equity, moving beyond tokenistic engagement to shared ownership and governance models.

Innovative financial instruments are helping make NbS investable:

• Green and blue bonds linked to ecosystem restoration or conservation outcomes.
• Sustainability-linked loans tied to nature-related or biodiversity performance metrics.
• Blended finance models combining concessional and private capital.
• Carbon markets, enabling the sale of verified credits from reforestation or peatland restoration projects.

These structures enable financial institutions to integrate nature-positive investments into mainstream portfolios.

The Biodiversity-Climate Nexus

Biodiversity loss and climate change are deeply interconnected and mutually reinforcing. Diverse ecosystems are more resilient to extreme weather events, store more carbon, and support essential functions like pollination, disease control, and water regulation. Conversely, climate change accelerates biodiversity loss, creating feedback loops that threaten global stability. By protecting and restoring ecosystems, NbS not only sequester carbon but also enhance climate adaptation capacity – a dual benefit increasingly recognized by ESG investors.

NbS deliver strong adaptation benefits that protect communities and assets. For instance:

• Rotterdam’s sponge city design: Incorporates green corridors and permeable surfaces to absorb excess rainfall and reduce flood risk.³
• New York City’s green roof programme: Over 1 million sq. ft. of green roofs have reduced building temperatures and helped manage stormwater runoff.⁴

Such interventions provide clear return on investment, both environmentally and financially.

NbS offer blended returns across multiple dimensions:

• Financial: Through carbon credit sales, natural capital-linked bonds, and land value appreciation.
• Environmental: Carbon sequestration, water retention, and biodiversity conservation.
• Social: Community employment, food security, and improved health outcomes.

NbS offer a proactive, measurable, and scalable approach to generating long-term value.

Natural ecosystems act as buffers against economic and environmental shocks. Wetlands absorb excess rainfall, forests moderate temperature extremes, and coral reefs reduce storm surge impacts. Integrating NbS helps diversify risk across ESG portfolios and enhances resilience to climate-related tail risks.

Regulatory and disclosure frameworks are increasingly incorporating nature-related considerations:

• Taskforce on Nature-related Financial Disclosures (TNFD): Developing guidance to integrate nature-related risk into financial decisions.
• EU Taxonomy: Includes criteria for sustainable forestry, conservation, and restoration.
• SFDR (Sustainable Finance Disclosure Regulation): Requires biodiversity-related disclosures for financial products.

These frameworks provide the necessary policy backing and risk clarity to scale up NbS investments.

While the potential for NbS is immense, true scalability hinges on addressing critical challenges.

• Measurement & Verification (MRV) Hurdles: The true scalability of NbS relies on robust, transparent, and standardized MRV frameworks. The market is evolving rapidly, but investors must be astute in discerning credible projects from those that merely ‘greenwash’.
• Scalability & Project Pipeline: The demand for high-quality, investable NbS projects often outstrips current supply. Financial institutions must explore innovative structures and partnerships to build a robust pipeline that can truly move the needle.
• Social Equity & Land Rights: As mentioned, genuine co-creation with, and equitable benefits for, local and Indigenous communities is paramount to long-term success and impact credibility.

Beyond the basics, Inrate’s approach to strategic entry points empowers institutions to engage effectively:

• Thematic NbS Funds and Green Bonds: Increasingly used to finance wetland restoration, afforestation, and nature-positive agriculture.
• Investing in Nature-Tech: Startups using AI, remote sensing, drones, and blockchain-based MRV (Monitoring, Reporting, Verification) to track ecosystem health in real time.
• Partnering with NGOs and Governments: Public-private partnerships such as the LEAF Coalition have mobilised over $1 billion to finance verified forest carbon credits, demonstrating a collaborative path to scale.⁵

Nature-based solutions are becoming an essential component of forward-looking ESG strategies for financial institutions. The transition to a nature-positive economy is not a distant ideal, but an urgent and lucrative frontier. Financial institutions that seize this moment will not only safeguard their portfolios but also emerge as leaders in building a resilient global economy.

• The Climate Ambition Gap
• Recognizing Indigenous Peoples’ land interests is critical for people and nature
• Sponge City Solutions: How Rotterdam is Leading Climate Adaptation with Green Infrastructure
• Green Roof Tax Abatement
• New public-private coalition launched to mobilize more than $1 billion to protect tropical forests and enhance global climate action