Nature-based Solutions (NbS) – ranging from urban wetlands and green roofs to permeable pavements and urban forests – are increasingly understood as needed for climate-resilient cities. As municipalities face intensifying climate risks, the transition from traditional grey infrastructure to green alternatives becomes no longer a choice, but a strategic necessity. However, despite the evidence of ecological and social value of NbS, such projects encounter structural barriers to large-scale implementation. However, these barriers can be removed – and involving local living labs can be especially useful for that.
Challenges to financing NbS in cities
It is increasingly clear that public funding is insufficient to meet the large-scale financial demands of NbS. This shortfall necessitates a search for alternatives; however, even contributions from foundations or grant providers will not be enough to cover the full scope. The difficulty in filling this gap lies in the traditional financial assessment of NbS. Unlike conventional ((partly) privately financed) infrastructure, which often has predictable revenue streams (e.g., energy tariffs or toll roads) to pay back the loan or private investment, NbS typically generates diffuse benefits such as biodiversity enhancement, heat island mitigation and improved public health. These benefits often fall outside of market mechanisms, resulting in a lack of clear financial revenue streams. Furthermore, the multi-functional nature of NbS creates a ‘silo problem’, where the costs are borne by one municipal department while the benefits are reaped by other departments, or by the public at large. This mismatch between the cost and the captured value often leads to a perceived limitation to finance NbS, discouraging private investment and over-burdening public budgets.
To bridge this gap, innovative business and financing mechanisms are required which move beyond traditional ones. The most promising pathway is the ‘Impact to finance’ framework. This logic shifts the focus from the cost of the asset to the local value of the outcomes it produces. (See illustration below.) By quantifying and monetising the physical impacts of NbS – such as cubic meters of stormwater retained or degrees of localised cooling from trees – cities can transform intangible environmental benefits into tangible local financial flows.
Development of the ‘Impact to finance’ framework
The consortium partner South Pole is currently developing an ‘Impact to finance’ framework for financing Nature-based Solutions (NbS) in cities in Europe. In order to improve it and make it more useful for cities, it was co-created together with the living labs of the cities on the 19 January.
Since South Pole has knowledge and expertise in the area of project finance and impact quantification, South Pole first made a first draft of the impact to finance framework (see below). To get feedback and inputs on it, South Pole invited the living lab managers, stakeholder managers and project managers of the URBREATH cities to an online co-creation workshop. South Pole encouraged the cities to also invite colleagues from the e.g. finance and/or legal departments from their municipality, as well as companies which the cities may already have (had) contact with.
Feedback on the ‘Impact to finance’ framework
During the workshop, South Pole first presented the draft framework (see above) and opened up for questions, which already indicated a type of feedback. Then, South Pole asked for feedback on the framework via the following four questions in an online Miro board, where the participants wrote their feedback on sticky notes:
- What could be improved, simplified or clarified in the framework?
- What do you like about the framework?
- Does the framework help you better understand how NBS can be financed? Why or why not?
- Do you feel that any monetisation mechanisms are missing? If yes, which ones?
The received feedback highlighted the need to include challenges around financial value estimation, specific value estimation tools, the target audience for the framework and the assessment of negative side effects.
Feedback on the ‘Impact to finance’ decision-making tree
Next in the workshop, South Pole presented the draft decision-making tool (see above) for using impact to finance for NBS projects. Then, the participants were asked to go through the decision tree with one selected project from their city and to share, which financing approach they ended up with. Then, the participants provided feedback, comments and other inputs on the decision-making tree on sticky notes based on the following questions:
- Did this process uncover a potential financing source that you hadn’t considered before today? Yes or no? If yes, please share which financing source you uncovered with a post it.
- What barriers/challenges would you face when applying this framework (e.g. regulation, data availability, funding, political support)?
- Did you encounter any ‘YES/NO’ decision points where neither option felt applicable to your real-world projects? If so, why? What other option would you like to see?
To gauge the feasibility of the suggested financing approaches, the participants were also asked the question “Which approach(es) of this framework could realistically be implemented in your city?”. To understand how common the approaches of the impact to finance framework are as of today, the cities were finally asked to share one or several project examples where one of the approaches had been used, how the cities valued the impact, and which value they assigned to the impact.
The feedback on the decision-making tool showed that the use of it can give ideas for new potential sources of financing and that the ‘Positive impact monetisation’ is the most realistic approach to implement. Challenges on financing were also shared, such as limited data availability, lack of political support, need for change in mentality as well as different time horizons between public bodies and companies/ financiers.
After the workshop, South Pole used the feedback to refine the framework and compile the final report. The report on the framework will also include case studies and will be publicly available during the spring. Keep an eye out for that!