Investing in natural ecosystems for resilience and sustainable finance

Sri Lanka is a country with an abundance of biodiversity and natural ecosystems. It has been recognised as one of 34 global biodiversity hotspots together with India’s Western Ghats, and it is home to a remarkable variety of species, many of which are endemic to the island.

However, Sri Lanka’s ecosystems as well as its economy are faced with a multitude of challenges and threats, including climate change, biodiversity loss, land degradation, the COVID-19 pandemic, global supply chain issues, and the need for economic recovery and sustainable development. Especially in the current context, it is therefore vital to leverage the country’s natural capital to access international finance and link ecosystem conservation with economic prosperity.

Ecosystems services and benefits

The needs of the hour are clear, including the need for building resilience and a more robust and sustainable economy that can attract investment and foreign inflows. Towards this goal, ecosystems can play a pivotal role. They are impacted by climate change and human activities, but they also have the potential to provide solutions and accelerate action.

As a country with ecosystems ranging from cloud forests to lowland rain forests and from river estuaries to seagrass beds, Sri Lanka has significant potential to harness nature-based solutions and mobilise finance and support on the national, regional, and global level. Natural ecosystems strengthen climate change mitigation, adaptation, resilience-building, and local livelihoods. They provide regulatory and provisioning services, strengthen disaster risk reduction, serve as habitats and nurseries, support natural cycles, and can hold great cultural, recreational, and aesthetic value.

These services and benefits can to some extent be quantified and expressed in numbers that far outweigh the profit of unsustainable extraction. In addition, ecosystems create value for entire communities and areas, not just individuals or companies, with many co-benefits for human health and wellbeing, biodiversity, and the economy.

Connecting ecosystems and financial flows

Considering this, how can Sri Lanka use its ecosystems to build a more sustainable financial system and long-term resilience? How can ecosystem services and ecosystem-based adaptation be turned into a business case and shown to be advantageous not just for nature and climate, but also in terms of economic stability and growth?

There is a range of available schemes and mechanisms that have been developed around the world to address this issue, for example payment for ecosystem services, national funds to support projects with ecosystem conservation and adaptation benefits, green certification schemes, or credit systems for development projects that impact ecosystems. These mechanisms all provide some sort of financial benefit for healthy nature and biodiversity, which goes towards strengthening the business case of protecting ecosystems.

Similarly, such benefits can be directly built into financial instruments and mechanisms, such as microfinance schemes to invest in sustainable adaptation practices or loans with lower rates if conditions related to ecosystem and biodiversity conservation are fulfilled. Healthy and thriving ecosystems often act as risk reduction measures, for example mangrove ecosystems that protect coastal communities against floods and even tsunamis. This provides an opportunity to link them to other aspects of a risk management framework, including insurance schemes that can give discounts on premiums if the insured party maintains the functionality of risk-reducing ecosystems. If nature-conscious and nature-positive systems in the financial sector are scaled up, it can result in win-win-win situations for consumers, financial institutions, and the planet.

One level higher, ecosystems not only save money when their conservation is incentivised on the domestic level, they can also enhance access to additional finance for the country. Potential sources of climate and development funding for ecosystems include multilateral funds (such as the Green Climate Fund, the Global Environmental Facility, or the Adaptation Fund) and development banks, bilateral development partners, and the private sector.

Some well-known classes of ecosystem-related financial instruments include green bonds, which fund projects with positive environmental impacts; debt-for-nature swaps, which convert foreign debt into funding for local ecosystem conservation; and carbon credits, carbon offsetting, or carbon insetting, which provide an opportunity to mobilise climate finance through conserving or restoring green and blue carbon ecosystems.

Besides multi- and bilateral public finance, there is vast potential to scale up funding from the private sector by communicating that the benefits of ecosystem-based adaptation are central to business considerations, not merely a side project for corporate social responsibility. Blended finance and public-private partnerships are a growth area that can be accessed by countries like Sri Lanka to unlock additional funding and enhance their ecosystem conservation and climate action while boosting economic recovery and growth.

Challenges and opportunities

Nature-based solutions can serve as powerful tools to mobilise finance. However, there are challenges related to conceptual clarity, lack of clear metrics and methodologies to measure benefits, gaps in technical capacities, and an insufficient overall volume of available funding. A landscape assessment of public international funding published in 2021 found that only 9-21% of all adaptation finance—1.5-3.4% of all tracked public climate finance—went towards nature-based solutions, with approximately 50% of this going towards countries in South Asia, Central Asia, and Sub-Saharan Africa.

Despite these challenges, Sri Lanka has serious potential to not only position its ecosystems as nature-based solutions against climate change and loss of livelihoods, but to turn them into a growth engine and a way to tap into critical regional and global finance streams.

(The writer works as Director – Research and Knowledge Management at SLYCAN Trust, a non-profit think tank based in Sri Lanka. His work focuses on climate change, adaptation, resilience, ecosystem conservation, just transition, human mobility, and a range of related issues. He holds a Master’s degree in Education from the University of Cologne, Germany and is a regular writer to several international and local media outlets.)