Nature Positive Financing the Tranisition in Cities

Debt instruments Debt instruments, such as investment loans, are the mechanisms most used by MDBs, particularly for climate finance.38 Loans, bonds and blended finance instruments are preferred financial mechanisms, which require less technical understanding of finance and nature.39,40 Debt instruments such as green bonds, sustainability-linked loans, and debt-for-nature swaps have contributed to the development of a dedicated market for nature finance and offer a diversified source of revenue for cities with limited budgets and autonomy.41 They typically require ongoing financing, however, with frequent application rounds, putting a constraint on limited city resources compared to more sustainable mechanisms like PPPs or project equity.42 Independent research identified three mechanisms linked closely with the sustainable impact of investments – cost of capital, access to liquidity, and changing corporate practices. Impact is attributed to an investor’s ability to alter each of these mechanisms. Analysis identified that for public lending, loans are the highest impact asset class due to lenders’ ability to influence all three dimensions.43 Equity instruments Equity finance, typically in the form of project- level equity, is less frequently used for nature initiatives because nature projects are inherently high risk and may have unpredictable or poorly understood outcomes.44 Risk mitigation instruments Risk mitigation instruments such as guarantees, insurance products, hedging instruments and credit enhancements act to reduce risk and dependencies on nature, in order to conserve, restore and value biodiversity and ecosystem services.45Other instruments $2,647 million100% 80% 60% 40% 20% 0%60,916 38,802 Results-based financing $2,337 million Low- and middle-income economiesHigh-income economiesLines of credit $6,975 million Equity $1,605 million Guarantees $2,738 million Grants $6,084 million Policy-based financing $9,243 million Investment loans $68,088 million37,10230,9864,136 8,4276,0781,7661,0081,056232 5979272,8392,1051,591 6816Total MDB climate finance by instrument (in $, millions) FIGURE 8 Source: European Investment Bank (EIB). Nature Positive: Financing the Transition in Cities 24