
Natural climate solutions for the voluntary carbon market: An investor guide for companies and financial institutions
This guide provides insights and practical advice for investing in Natural Climate Solutions (NCS) projects within the voluntary carbon market. It emphasises the role of NCS in addressing climate change and biodiversity loss by attracting private funding to high-quality, impactful projects.
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OVERVIEW
Introduction
Natural Climate Solutions (NCS), a subset of nature-based solutions (NbS), play a critical role in addressing climate change by leveraging nature’s inherent capacity for carbon sequestration. NCS projects also deliver biodiversity and socio-economic benefits, making them a unique opportunity for investors. However, a significant financing gap persists, with private sector contributions accounting for only a fraction of the needed investment. Bridging this gap requires increased engagement from financial institutions and corporations.
Natural climate solutions: An emerging asset class
NCS has emerged as a compelling investment opportunity, offering returns from carbon credits alongside climate, biodiversity, and social impact benefits. While carbon markets have faced scrutiny, enhanced standards, and methodologies have improved market integrity. Trust in the rigor of these markets is critical for scaling investments. Key benefits include scalability, affordability, and the ability to deliver verifiable outcomes. To succeed, projects must meet high standards for quality, integrity, and stakeholder inclusion.
Key stages of the NCS investment process
The business case: Five reasons to invest in NCS
Investors are drawn to NCS for five key reasons:
- Access to carbon credits: Direct sourcing of high-integrity credits for corporate climate goals.
- Market growth: The voluntary carbon market has grown substantially and is expected to rebound after recent declines.
- Hedging carbon prices: Early investments can secure credits at current rates, avoiding future price surges.
- Reputational gains: NCS projects enhance corporate image through visible climate, biodiversity, and social impacts.
- Diversified revenue streams: Additional income from sustainable timber, crops, or other ecosystem services.
Planning for investment
Effective planning involves selecting the right stage of project maturity, aligning finance structures with objectives, and mapping key stakeholders. Early-stage investments offer higher control and potential returns but carry greater risks. Later-stage investments are less risky but provide reduced influence. Comprehensive stakeholder mapping ensures the inclusion of Indigenous Peoples and Local Communities (IPs & LCs) in project design and implementation.
Due diligence: Evaluating the integrity of NCS projects
Robust due diligence is essential for identifying high-integrity projects. Investors should assess risks across four pillars:
- Commercial risks: Economic feasibility and credit value.
- Reputational risks: Alignment with stakeholder values and public perception.
- Regulatory risks: Compliance with local and international standards.
- Operational risks: Technical feasibility and long-term project sustainability. Special focus should be placed on ensuring FPIC from IPs & LCs, who are critical partners in project success.
Shared success: Revenue sharing agreements
Fair and equitable revenue-sharing agreements are pivotal to ensuring that IPs & LCs are adequately compensated for their contributions. These agreements align incentives, mitigate reputational risks, and ensure long-term stakeholder engagement. Financial structures may include fixed payments, profit-sharing models, or equity participation. Transparent grievance mechanisms should be established to address disputes and uphold trust.
Safeguarding rights and resources
Investors must navigate complex legal landscapes, including land rights, carbon ownership, and regulatory compliance. Engaging both international and local legal advisors ensures robust due diligence and mitigates risks related to land tenure, Indigenous rights, and pre-existing agreements. Well-structured contracts and legal protections enhance project credibility and reduce risks.
Running the numbers: Data collection and disclosure
Effective Measurement, Reporting, and Verification (MRV) systems are crucial for tracking project performance and ensuring transparency. Baselines and metrics must align with impact claims, focusing on measurable outcomes like emissions reductions and biodiversity gains. MRV processes support informed investment decisions, benchmark performance, and validate project success. Data disclosure is essential for maintaining credibility and attracting buyers.
Conclusion
Scaling NCS investments is vital to achieving global climate and biodiversity goals. High-integrity projects that engage stakeholders equitably and deliver verifiable outcomes are key to maintaining investor confidence. Governments, private investors, and regulatory bodies must collaborate to foster enabling environments that support NCS projects. By addressing current challenges and leveraging emerging opportunities, NCS can be scaled to meet the growing demand for sustainable climate solutions.