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Financing nature-based solutions for coastal protection in SIDS: a path forward

Coastal regions are on the front line of a changing climate, and Small Island Developing States (SIDS) are at the epicentre of this crisis. Global mean sea levels are projected to rise by up to 0.55 metres by 2100 even under low-emission scenarios, amplifying the threats of coastal flooding, erosion, and saltwater intrusion. The economic toll of these disasters is staggering; SIDS suffer disproportionately, with average annual disaster damages often exceeding 2% of their GDP. For some nations, the cost of recovery constitutes up to 40% of their national debt. This vulnerability is compounded by structural challenges; many SIDS are classified as middle- or high-income based on Gross National Income (GNI) per capita, which paradoxically excludes them from concessional financing, despite their acute economic and environmental fragility. In Seychelles, for example, approximately 90% of the population and critical infrastructure are situated on low-lying coastal plateaus, highlighting the existential nature of the threat.

In response, Nature-based solutions (NbS) are gaining traction as a powerful and resilient defence. The International Union for Conservation of Nature (IUCN) defines NbS as actions that protect, sustainably manage, and restore ecosystems to address societal challenges while benefiting human well-being and biodiversity. For SIDS, coastal NbS like mangrove forests and coral reefs offer a critical lifeline. Mangroves can reduce wave height by up to 66%, providing flood protection benefits valued at over US $65 billion annually and safeguarding more than 15 million people. Coral reefs can dissipate up to 97% of wave energy. NbS are often more cost-effective than traditional grey infrastructure, especially when considering their full range of co-benefits. For instance, coastal wetlands in the United States prevented over US $625 million in property damages during Hurricane Sandy, while mangrove restoration in Pakistan has been shown to triple local fish and crab catches, directly boosting livelihoods.

Hurdles in financing coastal NbS

Despite their proven value, attracting sufficient finance for NbS remains a significant challenge. Globally, finance for NbS reached US $200 billion in 2022, yet this is merely a third of the investment required to meet 2030 climate and biodiversity targets. While governments provide over 80% of this funding, both public and private investment face distinct hurdles and a significant scale-up of private investment is crucial to bridge the funding gap.

Challenges for attracting public investment in NbS include:

  • Sovereign debt constraints: High debt burdens in many SIDS limit the fiscal space for new government spending on environmental projects
  • Competing priorities: NbS projects must compete for limited national budgets against other urgent development needs like healthcare and education
  • Complex regulatory frameworks: Cumbersome public procurement processes and rigid, outdated regulations can delay project implementation and increase costs, as seen in coastal resilience efforts in cities like Boston
  • Capacity limitations: Government ministries may lack the specific technical expertise required to design, implement, and monitor large-scale NbS projects effectively

Challenges for attracting private investment in NbS include:

  • High-risk profiles: NbS projects involve ecological uncertainties and long, unpredictable timelines for financial returns increasing risk perceptions, which can deter conventional investors
  • Limited standardisation: A lack of standardised metrics to quantify and verify benefits like carbon sequestration or flood risk reduction makes it difficult to build compelling business cases
  • Small project scales: Many NbS initiatives are community-based and local in scale, limiting their appeal to large institutional investors seeking bigger ticket opportunities
  • Investor perception: Investors often note a “tug of war between investor appetite and investable deals,” with many projects perceived as too small or too risky to warrant investment

The challenges for public and private investment in NbS are intertwined. Sovereign debt constraints and competing public priorities can limit government-led “derisking” efforts that might make projects more attractive to private investors. Similarly, a lack of government capacity and clear regulatory frameworks can hinder the creation of a pipeline of investable NbS projects, further deterring private capital.

Innovative financing and strategic action for SIDS

Bridging these gaps will require innovative financing mechanisms to de-risk projects, improved standardisation, and enhanced collaboration between public and private sectors to build a robust ecosystem for NbS investment.

  • Blended finance: By strategically combining public or philanthropic funds with private capital, this model makes NbS investments commercially attractive for private investors. The Global Fund for Coral Reefs (GFCR) is a prime example, aiming to mobilise US $625 million for coral reef conservation and restoration by using a blended finance structure to de-risk investments in reef-positive businesses. For SIDS, this approach can make projects viable that would otherwise be considered too risky
  • Blue carbon credits: Coastal ecosystems like mangroves, seagrasses, and salt marshes are powerful carbon sinks. Blue carbon projects translate this sequestration capacity into tradable carbon credits. The Vida Manglar project in Colombia, for example, works with local communities to restore mangrove forests, generating income through the sale of carbon credits on the voluntary market. To scale this in SIDS, it is crucial to standardise measurement, reporting, and verification (MRV) frameworks to ensure the integrity and value of the credits generated
  • Payments for ecosystem services (PES) and insurance solutions: These models create direct revenue streams from the protective services that ecosystems provide. For instance, in Quintana Roo, Mexico, a portion of tourism fees contributes to a trust fund that pays for an insurance policy for the Mesoamerican Reef. Following storm damage, the insurance provides a rapid payout for reef repair and restoration. Initiatives like the Restoration Insurance Service Company (RISCO) are developing similar models where insurance revenues can be used to pre-emptively fund mangrove restoration, lowering risks for coastal communities and assets
  • Green and blue bonds: These instruments are being widely more used and implemented. Seychelles Sovereign Blue Bond, a global first, raised US $15 million from international investors to finance the expansion of marine protected areas and the sustainable management of priority fisheries
  • Impact investing: Funds like Blue Orchard Finance specialise in channelling capital towards projects that benefit communities and the environment. By developing diverse revenue streams and clearly monetising the co-benefits of NbS—such as improved fisheries, tourism, and resilient livelihoods—SIDS can create compelling opportunities for impact investors. Global partnerships like the Mangrove Breakthrough Initiative are critical here, as they work to build a pipeline of credible projects and enhance investor awareness

NbS represent a crucial paradigm shift, moving beyond static defenses towards adaptive, living systems that protect coastlines and resource-rich regions. To effectively close the financing gap for NbS, a dedicated and collaborative path forward is essential. This requires robust partnerships among governments, private investors, multilateral institutions, and local communities. By reforming national policies to create a more enabling environment, building crucial technical capacity within governmental and local entities, and leveraging innovative financial instruments that can de-risk projects and attract diverse capital, powerful alliances can be fostered.

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