Nature-based Solutions (NbS) yield high environmental and social returns, with clear economic value. According to the EU, every euro invested in nature restoration can generate between 4 and 38 euros in benefits, depending on sector and location. Take healthy wetlands: they can protect us from floods, a service that would cost millions to replicate with built infrastructure. Yet, despite their clear advantages, the world struggles to fund NbS at the scale needed. Mobilising capital for NbS through impact bonds provides a way forward. In this article, we explore which types of NbS projects are best suited for impact bond financing and how public and private sectors can work together to unlock their full potential.
Cracking the wall between private and public
Although NbS in sectors such as forestry and agriculture attract private capital, globally around 82% of NbS investments come from public funding. This is unsurprising, as many NbS deliver public goods such as clean air or flood protection, which are hard to commodify. For such NbS types, entities such as cities, development banks or utilities remain the best funders.
However, financial institutions can still support public NbS projects. An underused avenue for mobilising capital for NbS from institutional investors or other private-sector sources is the bond market. Public institutions can issue bonds to support infrastructure projects, amortising capital costs over time through scheduled repayment to bondholders. This includes green bonds, where proceeds are earmarked for environmental projects, a market projected to grow to USD 620 billion in 2025. In such bonds, NbS are often included within broader portfolios alongside green transport, energy or real estate projects. Issuers are increasingly diversifying into NbS. According to Moody’s, nature projects accounted for around 15% of green and sustainability bond proceeds in 2024.
This growth reflects how NbS and green bonds are an easy fit on paper. For example, successful NbS are often embedded within regional or ‘landscape-level’ biodiversity strategies that can be integrated in bond design. Moreover, payments do not need to rely on monetising the NbS but can instead come from the issuer’s general budget or balance sheet. This approach helps avoid transaction costs associated with the commodification of complex ecosystems services. Furthermore, tax revenue generated by increased economic activity associated with NbS can strengthen the business case for public actors. For example, in the US, the restoration economy generates USD 24.5 billion per year through both direct and indirect benefits.
Sovereign, sub-sovereign and corporate issuers are gradually increasing bond-funded biodiversity spending. For example, the Spanish region of Castilla y León’s 2023 Sustainable Bond allocated a portion of its proceeds to forest fire prevention, reforestation and conservation projects. British company United Utilities raised a GBP 300 million sustainable bond in 2021, using some of the proceeds to restore peatlands and riverbanks, thereby improving water quality and providing flood protection. Both bonds are part of the Triodos Euro and Sterling Bond Impact Funds.
This demonstrates that bonds can finance NbS across both public and corporate sectors. That said, corporate issuance of bonds for NbS remain modest relative to public sector issuance, except in the water and forestry sectors. Triodos Investment Management takes nature-based categories into account when assessing new bond investments and actively engages with issuers to better understand the challenges in scaling up.
What is stopping the ‘nature bond boom’?
In a survey funded by the European Union, investors cited green bonds as the most suitable asset class for NbS investments. Green bonds can offer relatively low-risk and steady returns while supporting environmental outcomes, with use-of-proceeds and impact reports providing transparency. So, what is holding this market back from booming?
One barrier is the limited pipeline of investor-ready NbS projects. Many NbS initiatives are localised, bespoke and long term. As a result, it can be challenging to aggregate sufficient project into a portfolio to back a multi-million benchmark bond, partly because early-stage financing is scarce for developing NbS projects to the point where they can absorb investments through a bond.
Another challenge arises from definitional gaps. For example, the EU Green Taxonomy focuses primarily on climate and excludes sectors such as agriculture and forestry from its definitions. As a result, these sectors cannot be easily counted towards Taxonomy-aligned spending. This poses a problem for issuers aiming to meet the EU Green Bond Standard, which requires 85% Taxonomy-aligned use of proceeds. Labelling can confuse investors, as NbS are often listed under broader terms such as climate adaptation or natural resources. This explains the wide range (1%–15%) in estimates of biodiversity-related bond proceeds.
Purpose and practice of the EU Taxonomy and the EU Green Bond Standard
Encouragingly, developments such as ICMA's Nature Bond Guidance and growing investor appetite for biodiversity are expanding the scope of nature finance within the green bond market. Still, to scale up green bonds for biodiversity, governments must lead by funding public goods, redirecting harmful subsidies and adapting policy frameworks such as the EU Taxonomy. Green bonds form an important piece of the nature finance puzzle but unlocking the full potential of biodiversity finance requires a coordinated public-private drive for greater ambition.