Ecosystem-based Adaptation
Ecosystem-based Adaptation (EbA), from a financial perspective, refers to the valuation, funding, and economic de-risking of climate resilience using nature-based solutions. Mangroves, forests and coastal wetlands act as economic assets that provide cost-effective climate protection while delivering financial returns. It is a conceptual approach that creates a link between biodiversity and ecosystem conservation approaches and sustainable socio-economic development as part of an overall strategy to adapt to the shocks and risks of a changing climate.
Preceded by concepts like Community-Based Natural Resource Management, EbA gained global attention following the UN’s massive Millennium Ecosystem Assessment in 2005, which highlighted the direct link between human well-being and healthy ecosystems. Later, around the 2010s, when submitting their Nationally Determined Contributions (NDCs), 60% of countries included ecosystem-orientated visions for climate adaptation. However, almost all NDCs that identify and reference ecosystem-based solutions link their successful implementation to the condition of additional climate finance.
Financing structure of EbA projects
A significant share of financing for EbA projects currently comes from international climate finance sources, particularly multilateral climate funds. These include the Green Climate Fund (GCF), which allocates 50% of its portfolio to adaptation, the Pilot Programme for Climate Resilience (PPCR), with approximately US $1.2 billion in funding, as well as the Adaptation Fund and the Special Climate Change Fund (SCCF).
Beyond dedicated climate funds, EbA projects are also supported by Multilateral Development Banks (MDBs) and bilateral development cooperation. Private finance currently plays a more limited role, with some EbA-related investments supported through market-based mechanisms and certification schemes. Voluntary carbon markets, for instance, have been used to generate additional revenue from eligible carbon benefits and contribute to the financing of EbA investments.
Barriers to scaling finance for EbA
- Limited investable cash flows: EbA generates significant economic and societal value through avoided losses, improved ecosystem services and enhanced climate resilience, but these benefits are rarely captured by the project developer as direct revenues. This creates a disconnect between the value created by EbA and the cash flows available to repay investors, limiting the applicability of conventional project finance. Long ecological gestation periods further compound this challenge, as benefits such as improved watershed health or restored ecosystems may take several years to materialise
- Weak project pipelines and limited aggregation: EbA investments are often developed as small, place-based interventions, resulting in fragmented pipelines that are difficult for institutional investors to access individually. The challenge is therefore not only project size, but the absence of mechanisms to aggregate projects into investable portfolios, standardise structures and reduce transaction costs. Intermediated vehicles, pooled financing structures and programme-level approaches can potentially address this gap
- Challenges in demonstrating and pricing outcomes: The benefits of EbA are multidimensional, spanning climate resilience, biodiversity, livelihoods, water security and avoided economic losses. These outcomes can be difficult to measure consistently and attribute to individual interventions. The resulting uncertainty makes it harder for financiers to assess performance, compare projects and, importantly, price the risk and value of EbA investments. The absence of sufficiently standardised outcome metrics also limits the development of performance-linked and results-based financing models
- Risk is concentrated during project development: Many of the risks associated with EbA arise before projects reach the stage at which commercial capital can participate. These include land and tenure issues, permitting, community engagement, ecological uncertainty and limited local implementation capacity. As a result, the highest-risk phase is often the least well financed, while concessional or public capital is frequently needed to absorb early-stage risks and bring projects to investment readiness
- Mismatch between beneficiaries and financiers: The entities that bear the costs of developing EbA interventions are not always the entities that capture their benefits. A municipality may invest in watershed restoration, for example, while downstream businesses, households or utilities benefit through reduced flood risk or improved water security. This weak alignment between who pays and who benefits limits the ability to structure direct repayment mechanisms and creates a need for public-sector participation, benefit-sharing arrangements or other mechanisms to capture part of the wider economic value created by EbA
- High perceived risk in emerging markets: In many developing and emerging markets, EbA investments are exposed to broader political, regulatory, currency and institutional risks. These can be compounded by uncertain land tenure, changing government priorities and limited institutional capacity for project preparation and implementation. In the absence of risk-sharing mechanisms, investors may therefore apply risk premiums that make otherwise economically valuable EbA projects financially unviable
According to the 2025 Adaptation Gap Report, the United Nations Environment Programme (UNEP) reported that developing countries will require US $310–365 billion annually by 2035 for climate adaptation, and if adjusted to inflation, this need could reach US $440–520 billion annually. With the current international public adaptation finance standing at only US $26 billion, this results in a financial gap of US $284–339 billion per year, making current funding highly inadequate.
Blended finance mechanisms for mobilising private investment in EbA
Blended finance can help address the structural mismatch between the public value generated by EbA and the risk-return requirements of private capital. Rather than replacing commercial finance, blended structures can use concessional capital, guarantees, technical assistance or outcome-based payments to reduce specific risks, create more predictable revenue streams, or improve the bankability of projects. The appropriate mechanism therefore depends on the constraint being addressed.
- Concessional loans: Concessional loans and grants can reduce the effective cost of borrowing where commercial financing is too expensive for projects to be financially viable. In Kenya, Murang’a South Water and Sanitation Company (MUSWASCO) faced a 17% commercial interest rate that made its water infrastructure investment difficult to finance. An US $80,000 Output-Based Aid grant, covering 60% of a US $140,000 loan, reduced the effective repayment burden to approximately US $40,000, making the investment more affordable
- Payment for ecosystem services (PES): PES creates a revenue stream by charging beneficiaries for ecosystem services, helping monetise benefits that would otherwise remain difficult to capture financially. In Xalapa, Mexico, watershed degradation was contributing to water insecurity and flood risks. A voluntary 2% charge on water bills raised US $500,000 in its first year, financing the restoration of 3,038 hectares across the city’s two main watersheds
- Guarantees: Guarantees reduce the risk borne by commercial lenders by covering a defined portion of potential losses, enabling financing that may otherwise be considered too risky or long-term. In Brazil, AGRI3 initially provided a 50% guarantee on a US $13 million, 10-year Rabobank loan for a sustainable agriculture project and later covered 100% of the residual risk. The guarantee enabled longer-tenor commercial finance for land restoration, with the project supporting degraded land rehabilitation and nearly 200 jobs
Conclusion
Ecosystem-based Adaptation (EbA) offers a cost-effective approach to building climate resilience while generating benefits for biodiversity, livelihoods, and sustainable development. However, significant financing gaps, high perceived risks, and limited investment-ready projects continue to constrain its scale and impact, particularly in emerging markets. Blended finance can help address these barriers by using public and concessional capital to mobilise private investment through instruments such as concessional loans, guarantees, and payment for ecosystem services schemes. As climate risks intensify, scaling blended finance mechanisms will be critical to unlocking capital, strengthening resilience, and accelerating the adoption of nature-based solutions worldwide.
Bibliography
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