Financing restoration: An exploration of solutions

The 2020s are officially the Decade on Ecosystem Restoration. As human activity demands on natural resources are far exceeding their ability to regenerate, putting entire facets of life and economies at risk, the initiative led by the UN aims to build momentum for the restoration of one billion hectares of degraded land by 2030. But a fundamental challenge remains: in our current economic system, natural resources only gain value when converted into commercial assets, discouraging their preservation in their natural state. The economical benefits of integral ecosystems have historically been difficult to assess, and their returns barely monetised. While protected areas have been created over the last century, with funding typically coming from public and philanthropic sources, or private sources counting on tourism revenues, this model has sometimes raised criticism and remains, in itself, insufficient to achieve wide-scale restoration.

But recent research is bringing invaluable data to the climate finance world, as for the first time the financial impact of restoration has been estimated. Economic studies from the Commonland Foundation show that, in Europe, the benefits of restoration are on average 8 to 10 times greater than the initial investment costs across all types of ecosystems, yielding positive impacts such as enhanced food production, mitigation of climate change and associated disasters, or improved water quality. The studies find that the restoration of biodiversity-rich land protected under the EU Habitats Directive is likely to generate EUR 1,860 billions of benefits for a cost of (EUR 154 billion cost). Worldwide, the economic benefits of restoration projects could even exceed these numbers, as it is estimated that every dollar invested in restoring degraded forests can yield between USD 7 to USD 30 in economic benefits.

As of 2022 harmful practices represent 30 times more funding than nature-based solutions, it is urgent to find actionable ways to mobilise public and private investments towards nature-positive projects.

The public sector: The roots of resilience

As financial incentives to exploit land resources in an unsustainable manner typically outweigh incentives to restore it, the public sector has a historic role to play in laying down the favourable conditions that can catalyse the private sector’s actions. A characteristic of public capital is that it can be dedicated to serving public welfare rather than being driven by profit motives. This represents a unique opportunity to act as a pioneer in restoration financing and enable other actors.

Public finance can play a primary role in scaling smaller restoration projects through mechanisms like revolving loan funds (RLFs). RLFs can offer short-term financing, which can be especially useful for timely land acquisitions in conservation, bridging the gap in slower public funding processes. By allowing timely purchases, RLFs ensure that conservation projects maintain continuous ecosystem connections. Long-term benefits also come from the sustainable nature of this type of funds: repayments from previous loans constitute a renewable capital source that finance future projects, ultimately expanding conservation impacts over time.

For developing countries, debt-for-nature swaps (DNS) are another effective tool, where portions of a country’s debt are forgiven in exchange for environmental commitments, freeing resources for restoration in biodiversity-rich areas. While both public and private debt can be addressed through this mechanism, in practice, 77 percent of debt-for-nature swap projects between 1987 and 2015 were funded through public agreements.

While public agencies have various ways to fund restoration projects, leading the way in implementing such activities to demonstrate the socio-economic benefits of nature-positive projects, public sector finance has a critical role to play as a catalyst of private investments.

The restoration of moorlands represents a unique opportunity for carbon sequestration, as peatlands alone store twice as much carbon as all the world’s forests. Credits: arg_flickr

Public/private, a story of symbioses

Indeed, governments and multilateral institutions hold a massive potential to contribute by investing in early-stage restoration projects, using de-risking mechanisms, co-financing, and providing guarantees to improve risk-adjusted returns for investors, making such projects financially viable and setting a precedent for private-sector participation. Incentives like tax breaks or subsidies, represent a first set of tools that can be used to encourage private capital to flow towards climate and environmental projects.

The use of blended finance is gaining momentous attention as an innovative approach offering a win-win solution. Blended finance is a strategy where public or philanthropic capital is combined with private investment to reduce risks and make sustainable projects more appealing to investors. This model attracts private sector funding for projects with social or environmental goals that might otherwise be seen as too risky or unprofitable. For example, blended finance facilitates projects that integrate “grey” infrastructure (such as roads or water management systems) with “green” solutions (like reforestation and wetland rehabilitation). By using public funds to offset risks inherent to the green component of such projects, blended finance enables initiatives that generate both financial returns and environmental or social benefits, supporting infrastructure that combines both elements. 

To address the high perceived risks associated with investing in developing countries and restoration projects, guarantees also represent another innovative mechanism. Leveraging public, philanthropic finance, or a combination of both, a guarantee mechanism can provide a safety net to impact investors seeking to step into nature-positive initiatives, by covering potential losses that could be incurred. Depending on the structure and scope of the guarantee, reimbursement to investors can be provided if the impact lending fails to yield expected repayments and returns. Mitigating risks via guarantees also builds long-term confidence for lenders, holding a significant potential in improving financing conditions, which are often relatively stringent, with banks demanding over-collateralisation, or high interest rates.

In BASE’s experience, notably setting up a Green Guarantee to support Small and Medium Enterprises (SMEs) in Peru, the development of eligibility criteria, KPIs, and the establishment of a system for monitoring, reporting, and verification (MRV) is key on top of the financial structuring of the mechanism. Determining the pricing of the guarantee is also of crucial importance to ensure its long-term sustainability.

Under any such approaches, it is important to underscore that creating successful examples, setting precedents for future restoration projects, is key to addressing one of the most important roadblocks of the field: the perception of high risks and low returns.

Sustainability-linked loans (SLLs) are rapidly gaining momentum as another innovative tool for financing climate adaptation and biodiversity restoration, making them well worth highlighting. SLLs, which can be issued by either public, private, or multilateral institutions, incentivise companies to take meaningful environmental actions by tying loan pricing – or terms – to specific nature-related key performance indicators (KPIs). In other words, SLLs can be delivered to finance any type of activity, but the borrower earns financial benefits upon the achievement of pre-determined sustainability targets, unlocking lower interest rates for example. An interesting case to highlight is the SLL that the Crédit Agricole issued to the Brazilian sustainable forestry company, Veracel. This loan ties Veracel’s financing terms to specific, measurable environmental targets, including the expansion of reforested areas, biodiversity conservation, and ecosystem health improvement as key KPIs. If Veracel meets these goals they receive more favourable loan terms, while failure results in higher costs.

Hence an array of financial instruments exist that can potentially increase the flow of finance to projects generating a positive impact on nature. However, beyond such catalysers, an enabling environment is essential to properly encourage the required momentum.

Organising the ecosystem

Beyond policy, which can in a myriad of ways both create incentives or barriers to financing, different tools have been recently emerging as pivotal to support the growth of the climate and nature finance sectors. Among them, taxonomies, also referred to as categorisation systems, are demonstrating a unique potential as they tackle a critical barrier finance actors face: the difficulty to identify investment opportunities that effectively yield positive impacts on the environment.

Indeed, sustainable, green, and circular economy taxonomies provide clear frameworks that define what constitutes respectively a sustainable, nature-positive, or circular economic activity. These frameworks classify activities, assets, and investment projects based on their alignment with established objectives, such as the SDGs, national targets like Nationally Determined Contributions (NDCs), or the Paris Agreement. By establishing clear eligibility criteria crafted by sector specialists and industry experts, taxonomies ensure that each activity contributes meaningfully to goals like climate change mitigation, adaptation, biodiversity conservation, or advancing circularity—while avoiding significant harm to others. This clarity helps investors identify and assess investments that genuinely contribute to sustainability goals, fostering transparency and trust in the market. By standardising criteria, taxonomies enable efficient capital allocation towards projects that support climate change mitigation, biodiversity conservation, and social equity.

These are also strengthened by frameworks such as the Taskforce on Nature-related Financial Disclosures (TNFD), which clarifies definitions of green and blue infrastructure to better integrate nature-positive actions into policy and finance standards. Long-term economic benefits of these restoration investments are well-documented; for example, the restoration of EU biodiversity-rich land could yield a cost-benefit ratio of 1:12.3, demonstrating how strategic public funding in nature restoration can multiply returns through increased food production, water quality, and carbon sequestration.

BASE is actively developing such classification systems to guide financial institutions. For example, BASE collaborated with the Inter-American Development Bank to assist Asobanca (Association of Banks of Ecuador) in developing a green taxonomy for private banking, establishing criteria to evaluate sustainable investment projects. Similarly, BASE is advancing the circular economy agenda in Costa Rica, Uruguay, the Dominican Republic, and Chile by crafting a categorisation system for circular opportunities. Alongside this, BASE provides capacity-building programs to equip financial institutions with the skills to integrate circular economy criteria into their strategies, driving progress toward national climate and sustainability goals. Last but not least, BASE provides technical assistance for developing catalytic blended finance solutions to enable and scale restoration and conservation initiatives. 

A path forward

The journey toward financing large-scale restoration is at a critical juncture. In face of the challenges restoration projects face, it is evident that neither the public nor the private sector can succeed without collaboration. By harnessing public-private partnerships, innovative financing mechanisms such as blended finance, guarantees, and sustainability-linked loans, provide a pathway to unlock much-needed capital while balancing economic and environmental priorities. Beyond financial instruments, fostering an enabling environment—through clear taxonomies, aligned incentives, and robust frameworks—will be essential to overcome key barriers and scale impactful projects.

The stakes of inaction are too high to ignore, but the opportunities for a nature-positive economy are immense. Deploying catalytic solutions and building capacity of the financial sector, can truly trigger restoration efforts that deliver long-term economic, social, and environmental returns.

This article is also published on BASE. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.