Policy Solutions to Accelerate Investment in Nature-Based Climate Action
Soil, trees, plants, and ecosystems like wetlands can play a vital role in carbon sequestration as part of California’s carbon neutrality goals. Natural and working lands can also be managed to reduce emissions from sectors like agricultural and livestock production. Nature-based solutions—including land-use measures, management of natural carbon sinks, and reductions in land-sector emissions—are a necessary component of California’s broader climate change strategy and offer substantial non-climate benefits as well, ranging from public health improvements to more equitable access to recreational opportunities and job creation. Despite these benefits, nature-based solutions often struggle to attract the capital necessary to bring projects to life. This report describes barriers to investment in nature-based climate solutions in California and presents actionable solutions to overcome those barriers.
Nature-based climate solutions can enhance California’s broader climate change strategy by generating significant net emission reductions and bolster (rather than replace) other emission reduction efforts. The state can target nature-based solutions to specific sources of difficult-to-reduce emissions, such as those from the agricultural sector.
The amenability of nature-based projects to greater investment will depend on a combination of factors, including the expected impacts of the project, the anticipated public and private stakeholder benefits, the ability to generate defined returns for investors, and the regions and ecosystems affected. Governments can provide some capital through direct investment, subsidized loans, and policy support, but they will need a significant increase in private capital to fill the gap.
California has an opportunity to pilot the uptake of financial innovations to support nature-based climate solutions, especially given the state’s combination of solid policies promoting proactive climate mitigation and adaptation and its statewide carbon neutrality goals.
Ensure that nature-based carbon sequestration projects in critical watersheds account for and utilize the value of resulting water savings
State leaders could promote the incorporation of water resource benefits as a means to attract more capital to forest management carbon sequestration projects. For example, a forest resilience bond could raise capital for projects that advance watershed conservation in forests. Investors interested in water- or forest-related climate change initiatives would have a tangible opportunity to support a project, at relatively low upfront cost and risk to the investor, while helping the project become a reality and receiving payment potentially from water utilities and carbon offset sources.
Align nature-based investment products with international standards and labels to drive investor interest
Investors interested in funding climate action often seek third-party labels that indicate the investment is consistent with internationally recognized pathways for decarbonization, such as the United Nations’ Sustainable Development Goals (SDG) or Climate Resilience Principles from the Climate Bond Initiative. California policymakers could encourage state agencies and other entities with nature-based climate action projects to ensure alignment with increasingly accepted definitions of eligible project types and therefore help attract more long-term investment. Aligning projects with existing definitions not only adds consistency and credibility through third-party verification but also improves investors’ ability to compare across nature-based and non-nature-based options, including more tangible, traditional infrastructure projects.
Leverage California Environmental Quality Act (CEQA) mitigation to fund projects on natural and working lands, such as mitigation for significant greenhouse gas emissions or transportation impacts under Senate Bill 743
CEQA requires feasible mitigation for projects deemed to have significant environmental impacts, and mitigation in the form of financial support for nature-based climate action with quantifiable sequestration benefits could help finance many of these projects. Examples include the establishment of a vehicle miles traveled mitigation bank or exchange under SB 743 (Steinberg, Chapter 386, Statutes of 2013) that helps fund the preservation of open space and other carbon sinks to avoid conversion to auto-oriented development, provided on-site mitigation measures have been exhausted by the project proponent seeking mitigation and that any funded projects adhere to strict and established standards regarding verifiability, enforceability, permanence, and additionality.
Make more lands eligible for carbon cap-and-trade offset protocols
Allowing more types of lands, including federal lands, to qualify for cap-and-trade or multi-state emission trading program offsets could potentially open a stream of funding for nature-based climate action, provided that policymakers include safeguards to ensure these projects meet strict requirements regarding enforceability, additionality, and permanence, among other standard offset provisions, and that they involve local and other affected communities in the project design, including Tribes.
Develop innovative insurance models to bring private investment and community approaches to nature-based resilience and climate solutions
Insurers and local governments could develop innovative structures that integrate policy elements such as community and regional risk pooling, premium reductions for mitigation investments, and natural infrastructure investments that offer multiple climate benefits.
Incorporate and develop financial data on all benefits of nature-based action to inform public funding decisions
Nature-based action may produce multiple public benefits not currently measured in terms of their comprehensive financial impacts. For example, projects may provide public health benefits from reduced wildfire severity, cleaner energy production, and enhanced recreational opportunities, as well as carbon sequestration or reduction benefits.
Standardize and refine carbon accounting methods and greenhouse gas protocol frameworks across land uses, sectors, and asset classes to incorporate quantification of natural and working lands emissions and sequestration.
While the California Air Resources Board and other state agencies have developed a robust set of tools to quantify carbon in natural and working lands, such as the Natural and Working Lands Inventory and cap-and-trade offset protocol, market actors still lack comprehensive methods to define the potential revenue-generating benefits of projects for investment. State agencies and external institutions could collaborate to standardize and refine a greenhouse gas accounting framework for natural and working lands, focusing on greenhouse gas reduction benefits through sequestration, reduced emissions from lands, and co-benefits. This work could draw on past and existing efforts to avoid duplication.
Develop and standardize environmental and community impact accounting practices to inform investment choices
Impact accounting practices could be enhanced by adopting methods to quantify non-greenhouse gas benefits, including reduction in wildfire risk, prevention of flooding and coastal erosion, local air quality improvements, water quality improvements, and long-term sustainability metrics, as well as resilience, public health, and quality-of-life benefits, especially for lower-income and disadvantaged communities. Quantifying these benefits as much as possible in the overall impact accounting not only enables communities and government agencies to prioritize projects they want to see funded first but also allows investors to find projects that align with their goals and priorities, such as healthy soils or flood prevention.
Require the integration of climate impacts into infrastructure planning and the development of green infrastructure standards
Legislation requiring climate-safe, science-based design standards for green infrastructure projects and planning would improve information availability while advancing project development. This action would catalyze financing by reducing uncertainty about a project’s lifespan and expected climate or economic impacts. Assembly Bill 2800, first enacted in 2016 and extended in 2020, could serve as a potential model for new legislation focused on green infrastructure.
Ensure the adoption of statewide green infrastructure design standards that integrate nature-based solutions into state agencies’ existing decision-making framework
Design standards would complement the goals of the framework legislation described above and remedy the existing discrepancy in nature-based project design standards, such as standards for habitat restoration, green infrastructure, or conservation projects. While “grey” infrastructure (like a road or building) has design standards and performance metrics that are widely applied and easy to conceptualize, green infrastructure projects could benefit from similar design and performance standards. Green design standards are also limited by a lack of engineers trained in green infrastructure design. State agency leaders could encourage academic institutions to build curricula tailored to green design standards and offer workforce training opportunities.
Dedicate funding to demonstration projects aimed at improving measurement and quantification practices
Nature-based demonstration projects would allow real-world application of the performance measurements and accounting practices developed in the previous solutions, while also enabling investors to respond to the measurements presented in the project. Deploying multiple projects simultaneously could help researchers compare across benefit types to develop more comprehensive metrics while taking into account the unique attributes of each project type.
Bundle and/or diversify nature-based climate actions to achieve investment scale and reduce risk
While investment scale will likely increase as the market matures, there is a need to develop strategies to bundle and diversify actions in the near term in order to achieve scale, reduce risk, and attract more market-rate investment. Strategies include blended finance, third-party management structures, integration with California’s carbon market, leveraging green public finance, bundling and securitization, and corporate engagement.
Develop mechanisms to increase the insurability of forest and watershed assets
State legislators could consider legislation to require insurers to guarantee the availability of insurance for agricultural or forest management activities that follow a series of appropriate wildfire/disaster mitigation measures certified by the California Department of Insurance, similar to proposed Assembly Bill 2367 (Gonzalez) for residential property insurance; or to build on 2018’s Senate Bill 824 (Lara, Chapter 616) and 894 (Dodd, Chapter 618), which require policy renewals in case of certain catastrophic losses.
Promote investment in nature-based climate action that aligns with long-term funding goals
CalPERS and CalSTRS, California’s two largest public employee pension funds, together manage over $600 billion in assets. Both have taken nation-leading steps to reduce climate risk and increase sustainable investment in their portfolios. CalPERS and CalSTRS could consider investment in California natural infrastructure projects to reduce portfolio climate risk further, accelerate long-term net-zero asset goals, and advance sustainability goals for the state as well as beneficiaries’ communities. State legislators could also consider refining disclosure requirements or directing assessment of natural climate solution investment opportunities to support this effort, building on the work on state investment and asset stewardship begun by the Climate-Related Risk Disclosure Advisory Group pursuant to Executive Order N-19-19 and the subsequent California Climate Investment Framework.
Conduct advance planning and permitting for multiple potential projects to create “portfolios” for grantors and investors to finance
A project sponsoring agency may have difficulty obtaining substantial private investment if it cannot present “shovel-ready” project proposals. To minimize this risk, state land and resource managers can conduct these due diligence activities in advance to create project portfolios for presentation to investors/partners, contingent upon data availability about the potential projects’ benefits.