AssessmentandOptionsAnalysisofClimateandNatureFinancingInstrumentsandOpportunitiesSUMMARYNOTEONFINANCINGFORCLIMATEANDNATUREAssessmentandOptionsAnalysisofClimateandNatureFinancingInstrumentsandOpportunitiesPublicDisclosureAuthorizedPublicDisclosureAuthorizedPublicDisclosureAuthorizedPublicDisclosureAuthorizedbElissonWright,JamesSeward,FionaStewart,AndersonSilva,FedericoAzpirozCosta,RachelMok1developmentoffinancialproductsinthecapitalmarketsisthatclimateandnature-orientedmeasures,especiallyGPGs,donotalwaysprovideafinancialreturnorgeneratepositivecashflow,andclimateandbiodiversityconsiderationsarenotfullyintegratedintofinancialmodels’investorsusetoallocatecapital.Inaddition,despitesignificantadvancesinthedevelopmentofclimateandnature-relatedfinancialriskassessmentframeworksandregulations,theawarenessoftheserisksisstilllimitedamongfirmsandtherecurrentlyarenoestablishedstandardsformarketparticipantstoapplyinthismarket2.LeveragingfinancetomeetnationalcommitmentsandimplementclimateandnatureplansThereissignificantmomentumgloballytointegrateclimateandnaturecommitmentsinnationaldevelopmentplans.CountrieshavemadesignificantprogressinoutliningclimatemitigationandadaptationchallengesandopportunitiesintheirNationallyDeterminedContributions(NDCs).NDCs,NationalBiodiversityStrategiesandActionPlans(NBSAPs)andothernationaldevelopmentandsustainabledevelopmentplanssetthevisionandobjectivesforpriorityclimateandnatureinvestmentopportunities.Inaddition,countriesarealsodevelopingnationalclimatefinancingstrategiesandpartnershipengagementeffortstochannelmoreresourcestowardstheircommitments.Theupdatedplansoftencontainmonitoring,review,andverification(MRV)frameworksformitigationandadaptationtotrackclimateandnaturefinanceflows.Itisnowmorecommonforsector-specificplanstodetailthespecificnearandmedium-terminterventionsandSDGs’linkages.1.ContextDespiteincreasingrecognitionofthematerialimpactofnaturedegradation,theglobalfinancinggapforclimateandnatureinvestmentsissignificantandgrowing.ThePaulsonInstituteestimatedin2020thatthebiodiversityfinancinggapatanaverageofUS$711billionperyear.Governmentleadersandprivateenterprisesmustaccelerateandscalefinancialresourcemobilizationstrategiestoclosethisgap.However,atanationallevel,manydevelopingcountrieshavelimitedmarketaccessandlackthefiscalspacetomobilizefinancingatthescalerequiredtoavoidtheseverenegativeimpactsofbiodiversityloss,naturedegradation,andreducedecosystemservices.Thiscanprecipitatecountriesintoaviciouscircle,wherebydelayedinvestmentatscaleexposesthemtotheriskofecosystemscollapse.Thesesystemsalsoprovideessentialclimatebenefitsintermsofcarbonsinksandadaptationbuffersagainstsevereclimateimpacts(e.g.,floods,droughts,storms).Thesenaturalassetsunderpineconomicgrowthofdevelopingcountriesbutarecurrentlyundervaluedandunderinvested.Giventhedifficultyofestimatingthetiming,progression,andextentoftheseimpactsandtheirglobalpublicgood(GPG)nature,othermoreimmediateorvisibleneedstendtobeprioritized.However,whennature-relatedrisksmaterialize,economicactivityislikelytocontract,furtherreducingfiscalspace,increasingacountry’sborrowingcosts,anddelayinginvestments.Evenwhentherisksandbenefitsofinvestinginclimateandnaturearerecognized,thereisalackofbankableandfinanciallyprofitable/commerciallyviableprojectsinmanycountries.FinancialproductsthatdirectlyfinancenatureactionarenascentandEnvironmental,Social,andGovernance(ESG)andimpactinvestorshavelimitedoptionstochannelcapitaltodirectlysupportprojectsthatdelivernatureconservationoutcomes,especiallyinlowerandmiddleincomecountries.AnunderlyingreasonforthelimitedAssessmentandOptionsAnalysisofClimateandNatureFinancingInstrumentsandOpportunities2Thesenationaleffortsprovidetheplatformforlaunchinginitiativestoovercomeclimateandnaturefinancingchallenges.Progressneedstobemadeontwofronts:incentivizingimprovedmanagementofclimateandnaturerisks(greeningfinance);andmonetizingcashflowsfromtheprovisionofclimateactionsandecosystemservices(financinggreen).Greeningfinance.GovernmentsareestimatedtospendatleastUS$800billiononfossilfuel,fishing,andagriculturalsubsidies.Whileimportantforimmediateconcernssuchasfoodsecurity,livelihoodsandincomes,theyareharmfultobiodiversityandwillcompromiselonger-termdevelopmentoutcomes.i“Greeningfinance”referstoeffortstodirectfinancialflowsawayfromprojectsandprogramsthatdetrimentallyimpacttheclimateagendaorbiodiversityandecosystemservices,towardinvestmentsthatmitigatesuchnegativeimpactsordeliverpositiveclimateandenvironmentalco-benefits.Examplesincludecreatingfiscalincentivesforincorporatingnature-relatedrisksintoinvestmentdecisions,orrepurposingsubsidiesharmfultobiodiversitytowardsnature-friendlyprogramsandprojects.Financinggreen.Whileasubstantialportionoftheclimateandnaturefinancinggapcouldpotentiallybeaddressedthroughsubsidyreformiiorother“greeningfinance”measures,directinvestmentsinclimateactionandnature-basedsolutionswillalsoplayakeyrole.“Financinggreen”involvesinvestmentsinprojectsandprogramsthatcontributetoclimatemitigation,climateadaptationaswellastheconservation,restoration,andsustainableuseofgreenandbluebiodiversityandecosystemservices.Examplesincludetheuseofconcessionalfinancetode-riskandscaleprivateinvestmentandpilotfinancialsolutions.Forinstance,fixedincomeproductslinkedtoforestry,non-timberforestproducts,wildlife,andfishing,canhelpchannelfinancingfromthecapitalmarkets.Anotherexampleisinvestingdomesticpublicfinanceinnature-basedsolutionsthatgeneratenatureco-benefitswhilemeetingotherdevelopmentobjectives.3.EngagingdevelopmentpartnersintechnicalassistanceandfinancingGovernmentsareincreasinglyseekingtechnicalandfinancialsupporttoenhancethesustainabilityandclimateresilienceoftheirinvestmentsandstrengthentheirtechnicalcapabilitiestostructureanddeployinnovativefinancialsolutions.TheWBG,alongwithotherMDBs,iscommittedto:(i)developingfinancialinstrumentstosupportclimatemitigationandadaptation,aswellasreversenaturelossandpromotenatureprotection,restoration,andsustainableuse;and(ii)expandingtheuseofinnovativeinstruments,bothfinancialandtechnical,tosupportclimateandnaturepositiveinvestments.Buildingonandcomplementingotherrelatedassessmentframeworks,includingtheCountryClimateandDevelopmentReport(CCDR),andFinancialSectorAssessmentProgram(FSAP)ClimateandEnvironmentalRiskandOpportunity(CERO)Framework,TheWBGhasalreadyprovidedcountry-leveloptionsanalysistechnicalassistancesupporttoKenya,Jordan,Malawi,Rwanda,Ethiopia,Maldives,andothercountriestoassesspotentialpolicy,debt,andnon-debtinstrumentsavailabletohelpcountriesscaleclimateandnatureaction.Theseexperienceshighlighthowvariousinstrumentscanbeusedtomobilizeadditionalpublicandprivatefinancing.Italsoemphasizesthepotentialcountry-driveneffortsandplatformsoffertomaximizefinancinginstrumentsavailabletocountriestoincreasenatureandclimateactionthatdeliverGPGsandgeneratebenefitstolocalcommunities.AsummaryoftheseinstrumentsishighlightedinAnnex1.3Sovereigngreen/bluebonds:Whencapitalmarketconditionsareconducivetonewsovereignbondissuances,governmentscanexplorethepotentialforause-of-proceedsgreen,blue,orsustainablebondissuance.1Thesebondscanbeissuedintheinternationalordomesticmarket,dependingonmarketopportunities.Sovereigngreenbondscanbringinnewinvestors,signalpositivepolicydirections,generatefundingforspecificportfoliosofeligiblegreenprojects,andpotentiallyyieldslightlybetterfinancialterms.Toprepareforfuturebondissuances,countriescanpreparegreen/bluebondframeworksthatestablisheligibleexpenditures.Theseuse-of-proceedsbondscanpotentiallybeissuedatthenationallevelorasub-nationalentity.ImpactmonitoringcanbelinkedtoNDCpriorities,includingGHGsavoidedorcaptured,orNBSAPs.MDBsandbilateralpartnershavesupportednumerouscountriesgloballyonthedevelopmentofsuchframeworks.Publicgreen/bluebondscanalsoserveasaprecursorforissuancesbytheprivatesector.Sovereignsustainability-linkedbonds(SLBs)ArelativelynewformofsustainablebondsaretheSLBs,whichtiethefinancialperformanceofthebondtotheachievementofpre-established,agreed-uponKeyPerformanceIndicators(KPIs).ThelackofprogresstowardstheKPIachievementcanresultinanincreaseintheinstrument’scoupon,andsimilarlyexceedingtheKPIscanresultintheloweringofthecoupon.However,despitebeingissuedtoattainaspecificKPI,theyaregeneral-purposebonds,andthefundsarenottiedtoaparticularuseofproceedsallocation.SLBshavebeenpredominantlyusedinthecorporatespace,buttheyareincreasinglybeingexploredbysovereignentities(e.g.,UruguayandChile)fortheirversatilenatureandthecapacityoftheissuertosetsuitableKPIsaswellastoraiseinvestors’interest.Thisapproachmaybeinterestingforcountriesto4.PublicfinancingSpecificinstrumentscountriescanconsiderleveragingtocatalyzeclimateandnaturefinancebythepublicsectorinclude:Grants:Intheshortterm,manycountrieswillcontinuetorelyongrantsfromdonorstofundnatureandclimateprojectsandprograms.Thesegrantscanbeusedtoaccelerateprivateclimateandnatureinvestments.Countriescanengagebilateralandmultilateraldonorsinprojectfinancingaswellasprogramforresultsandoverallbudgetsupport.Therearealsoanincreasingnumberofphilanthropicorganizationsprovidingsizablegrantsfornatureandclimate.Thesegrantscanpotentiallybestructuredintoinnovativefinancing,includingcapitalizingnationalclimateandnaturefunds,providingequityforprojects,andde-riskinginvestmentsorblendingitwithotherfinancingtoreduceoverallcosts.Concessionalfinancing:NationalTreasuriesandMinistriesofFinancecanexploreopportunitiestomaximizeconcessionalandsemi-concessionalfundingfromvariousdonors,particularlydevelopmentbanksandbilaterallenders.Concessionalloanscanbeblendedwithsemi-ornon-concessionalloanstobringtheall-incostsdownforspecificbudgetorprojectinvestmentsinpriorityclimateareas.Countriescanalsoexploremoreinnovativefinancialstructuresfromtheseconcessionalandsemi-concessionalresources.Forexample,theycanbeusedforliquiditybackstopsforclimate-focusedprojects(e.g.,tocreateapricefloorunderapowerpurchaseagreementforrenewableenergyprojects)toincentivizeprivatesectorinvestments.Inaddition,concessionalfinancingcanbeusedintheformofguaranteesthatmaygivecountriesaccesstothefinancialmarketsatbetterterms.Theenvironmentalandsocialsafeguardsthatareappliedwouldalsogiveaddedcomforttoinvestorsonthequalityofprojects.AssessmentandOptionsAnalysisofClimateandNatureFinancingInstrumentsandOpportunities4whichofferlessonslearnedandinsightsforreplicationandscaling.Technicalassistance,knowledgeexchanges,andfinancingcanhelpcountriesandsubnationalgovernmentstodevelopandinvestinprojectsandprogramsthatsupportlocallyledurbanandperi-urbanclimateactions,privatesectorincentivesforlow-carbonemissionsandclimateresilientinvestments,andoperationalizedmarket-basedmechanismsforcarbontrade.5.Privatefinancing,includingthefinancialsectorAsmanydevelopingcountriesareexperiencingfiscalconstraintsandchallengingmacroeconomicconditions,alargeshareofnewfinancialresourceswillneedtocomefromtheprivatesector.Forsomesectorsthathaveanestablishedmarketandwherecustomersalreadypayforproductsandservices(i.e.,energy,water,transportation,etc.)privatesectorcandeploybusinessmodelsthatcangenerateaprofit.Forothersectors,includingsomebiodiversityandclimateadaptationinvestments,significantfinancialincentivesorrisk-basedfinancingmaybeneededforprivateenterprisestodeploycapitalwhichmaynotgeneratesufficientreturnsintheneartomediumterm.Domesticfinancialinstitutionscanplayanimportantroleinclosingacountry’sclimatefinancinggap,butinmanycountriestheirroleshavebeenlimitedtodate.Thereareseveralbarriersinsideandoutsideofthefinancialsystemthatlimitthedevelopmentofgreenfinancemarketsatscale.Forexample,thereismisalignmentbetweenfinancialsectorpoliciesandincentivesforclimateandenvironmentalobjectives.Inaddition,manycountrieslackataxonomythatprovidesaframeworktoassesswhichinvestmentscanbeclassifiedasclimate,greenorblueforacertainjurisdictionbyfinancialactors.Thereisalsooftenalimitedpipelineofbankablegreenprojects,partlyconsiderasachievementofKPIscanprovideastrongfinancialincentiveandbenefittothegovernment.TheWorldBankhasbeenworkingoninnovativesustainability-linkedfinancialstructuresandonimprovementsonKPIdesignandmeasurementtoamplifyaccessofthisformoffinancingforabroadersetofsovereignsandotherpublicsectorentities.DebtforResultsRefinancing:Somecountriesmayhaverefinancingpossibilitiesofexistingcommercialpublicdebtswithsomeformofconcessionalfinancingsupportfromdonorsorotherwisewithadesignatedpurposetoinvestinspecifiedareas,suchasnatureconservation.Inaglobalcontextinwhich60percentoflow-incomedevelopingcountriesarealreadyathighriskoforindebtdistress,suchopportunitiescouldbefoundforcountriesthatneeddebtrelief,forwhichdebtrestructuringcouldbewarranted.Detailedanalysisanddiscussionwithdevelopmentpartnersandratingagencieswouldbebeneficialtoassesspotentialnegativeimpactsofothermarket-baseddebtfinancingoptions.Debt-for-nature/climateswaps(e.g.,Ecuador,Belize,Barbados,etc.)havebeenusedtoprovidepartialdebtsavingsconditionaltoaclimatespendingcommitmentofequalorsmallersizethanthedebtservicesavings.Swapscanreducegovernmentdebt,typicallyexchangingmoreexpensiveolddebtforcheapernewdebtandredirectingthesavingstowardsanagreeduponconservationinitiative.Debt-for-climateswapsneedtobeconsideredonacase-by-casebasisassessingtypeofdebt,costs,termsandconditions,andotherfactorswhichneedtobecarefullyconsidered.Swapsshouldalsonotcomeattheexpenseofconcessionalfinanceorbroaderdebtreforms.Subnationalgreen/blueinvestments.Subnationalgovernments,municipalities,andstate-ownedenterprisesacrossregionshavegainedexperiencesinrecentyearswithclimateandnaturefinance,5•Carbonmarkets:TheuseofcarbonmarketscanincreasetheresourcesmobilizedfromboththepublicandprivatesectorandreducethecostsofimplementingNDCs.Arobustframeworkisrequiredtoprovidethenecessarylegalbasisforcarbonmarkets.Oncethelegalframeworkisinplace,regulationsorpoliciesareneededtooperationalizethelegislation.GovernmentsalsoneedtodevelopthenecessaryinfrastructureintheformofMRVsystemsandregistryinfrastructure.TheWorldBankhasawiderangeofcapacitybuildingandpilotinginitiativestosupporttheseefforts.Forexample,theWorldBank’sCarbonInitiativeforDevelopment(Ci-Dev)supportsgovernmentsimplementthestandardizedcreditingframeworkatanationallevelwhichcanfacilitatethedevelopmentoftheinstitutionalandgovernanceframeworksforparticipationininternationalcarbonmarkets.Oncecarbonpricingcanbeestablishedwithcrediblesellersandbuyers,carboncreditscanbecomeanassetthatcanbeusedinmultipleways,includingasrevenueforprojects,collateralforbondissuances,fundingforbondrepayments,andotheruses.OnerecentinnovationinVietnamwasaWorldBankemission-reductionlinkedbondthatenabledthecouponstobepaidviathegenerationofcarboncredits.•Outcomebonds:Outcomebonds,suchastheWildlifeconservationbond(WCB),arearecentinnovationdevisedbytheWorldBanktofinancebiodiversitythroughthecapitalmarketsbasedonachievementofimpacts.Essentially,adonorinstitution(suchastheWB)issuesabondagainstitsownbalancesheetandtheinvestorsforgothecouponpaymentsupfront.Thebondissuerthentakesthepresentvalueofthecouponpaymentsandprovidesthemasgrantinstallmentsdirectlytotheimplementingagencywithinabeneficiarycountry.Theprivateinvestorswhopurchasedtheduetothelimitedmotivationorcapacityoffinancialinstitutionstoidentifyandoriginateclimateassets.Furthermore,thehighupfrontfinancingcosts,transactionscosts,lackoftrackrecordofnewtechnologies,andlongpaybackperiodsofgreeninvestmentscouldincreasetherealandperceivedriskinessofclimateprojects.Macroeconomicshocks,suchasrisinginflation,highlevelsofpublicandprivatedebt,andrisinginterestratesglobally,alsohavearippleeffectonthefinancialsector’sopennesstomakeupfrontinvestmentsinnewtechnologies.Inaddition,inthecaseoflow-incomecountries,thedomesticfinancialsectorisoftentoosmalltocoverthelargeclimateandnaturefinancinggapthatthecountryfaces.Toaddressthesechallenges,severalnon-debtinstrumentsarereceivingattentionandcanbeconsideredaspartofabroaderclimateandnaturefinancingportfoliousedbysovereigns,developmentpartners,andotherstakeholders.Sampleinstrumentsthatcanbeconsideredtostimulateclimatefinancefromtheprivatesectorinclude.•Privateequity/natureinvestmentfunds:Fundsinvestinginnature/climatetechnologytodeploynewtoolssuchasartificialintelligence,geospatialsolutionsandremotesensing,communicationsincludingdigitalconnectivity,data,andvarioustrackingandtransportationsolutions.Thereisanincreaseinprivateinvestmentstodeploydigitaltoolstocertifyandtraceproductsthatminimizenegativeenvironmentalimpactstonature.Thereisalsoscopeforpublic-privatefundsthattakeminoritystakesincompanieswhosemissionistosupportclimatemitigationandadaptationorrestorenature.Companiesarealsoincreasinglyfocusingonintegratingclimateandnature-relatedimpactanddependenciesintheirsupplychainsthroughenhancedpolicies,standards,sourcing,andreporting.AssessmentandOptionsAnalysisofClimateandNatureFinancingInstrumentsandOpportunities6bondwillreceiveareturn(coupon)onthebondbasedonthesuccessoftheassociatedconservationinitiative.Thesuccesspaymentofthecoupontoinvestorswillbecoveredbyagrantpaymentfromathird-partydonor.Theprincipalofsuchbondswillbeusedforgeneralpurposesbytheissuer.TheWorldBankin2022issuedthe“RhinoBond”tosupportblackrhinoceros’conservationinSouthAfrica,whichlinksinvestorreturnsbasedonthegrowthoftherhinopopulationintwositesinSouthAfrica.•Paymentforecosystemservices(PES)andBiodiversitycredits:PESandtheemergingbiodiversitycreditmarketofferpotentialtogenerateadditionalresourcesforgovernmentsandtargetfundstofarmers/ruralcommunitiesfortheprovisionofecosystemservices.Thesemarketsareinearlystagesandnotyetwidelyadoptedtogeneratelargescalefunding.Aslegislation,methodologies,andfinancialmechanismscontinuetomaturetheseschemescanpotentiallyprovideadditionalsourcesoffundingandrevenuestreamstosupportdeploymentofnewfinancialinstruments.PEScanbeimplementedthroughgovernment-sponsoredprogramsorthroughcomplianceandvoluntarymarkets.UnderapublicPESprogram,thegovernmentpayslandholderstoundertakeactionsthatincreasethesupplyofecologicalservicesfromtheirland.PEScantargetrestorationofforeststhatprovidenon-timberservices(e.g.,mixednativespeciesforests),whichmarketsdonottypicallyrewardlandholderstosupply,aswellasthosethatprovidecommercialopportunities(e.g.,mixingtimberforestsandnativespecies).GovernmentscanalsodevelopandimplementnationalPESprogramsthatinvolvecostsharingwithsubnationalgovernmentsorprivatecorporationsandthatleveragecomplianceandvoluntarymarkets.CompliancemarketsforPESincludebiodiversitymitigationbanks(e.g.,theUSandAustralianmarkets).Inadditiontoinvestmentinstruments,countriescanleverageagrowingsetofriskmanagementdata,tools,andinitiativestodirectcapitalawayfromharmfulinvestmentsandtowardsnature-positiveactivities.Governmentagenciesandprivatesectorleaderscanincreasetheireffortstoreduceclimateandnatureriskbydevelopinganddeployingasetofriskmanagementtoolsandactions.Astartingpointcanincludethefollowing:•Leveragetechnologyandinnovativetoolstoinformclimateandnaturefinancedecisions.Rapidadvancesintechnologicaltoolscanassistwithdatacapturingandreporting,alongwithtraceabilityofinvestments.Inaddition,internationalanddomesticdisclosureandreportingrequirementsaredrivingadoptionofapproachestoidentifyclimateassets,projects,andcompanies.ExistingandemergingglobalguidanceiscurrentlyprovidedbyTCFD,TNFD,andIFRS.Aclimatefinancetrackingsystem(inlinewithahigh-levelgreen/bluetaxonomy)canhelpcountriestracktheirclimateandnatureinvestments.Informationplatforms,includingthosethatleverageblockchaintechnologies,canbedevelopedtoenhanceaccesstoinformationaboutclimateandnatureinvestmentsandincreasetransparency.•Enhancetheavailabilityandqualityofdatarequiredtomonitorandmanageclimaterisks.Centralbanksandotherfinancialregulatorscanalsocollectmorecomprehensiveandgranulardata(includingimpactanddependencyofbankingsectoronnature,geographicalexposure,etc.)andworkwithothergovernmentagenciestoimprovethequalityofclimatedata(e.g.,earlywarningsystems).7intokeynature-relatedfinancialrisks,itcanalsoindirectlyhelpincentivizethedevelopmentofsuitablefinancialinstrumentstoclosenatureandclimatefinancegaps.•Developanationalstrategyandroadmapforgreeningthefinancialsector:Anationallevelstrategyorroadmapcansignalitscommitmenttothenatureandclimateagenda.Mainstreamingclimateintobroaderfinancialsectorplanscanalsohelpassessfinancialsectorconditionsactaskeybarrierstoclimatefinance.Allrelevantauthoritiesshouldbeconsultedonthedevelopmentofanationalstrategy(beyondthoseresponsibleforfinancialsectordevelopment)toseekandobtainfeedbackfromfinancialandnon-financialinstitutions.Thegoaloftheroadmapistoalignfinancialsectorpolicies,regulations,andincentiveswithnationalenvironmentalandclimateobjectives.Incentivizingbanklendingtowardsclimate-friendlyprojects,ordisincentivizingcreditawayfromharmfulprojects,cangraduallytransformtheflowsofinvestmentsinaneconomy.•Deepenandbroadendisasterriskfinancingandinsurance.Adequateaccesstofinanceisessentialforacountrytostrengthenitsresilienceinkeysectorsvulnerabletoclimatechange,includingenergy,agriculture,tourism,etc.Anationalclimatefinancestrategy(orastand-alonenationaldisasterriskfinancestrategy)candetailthegoalsandobjectivesforstrengtheningfinancialresilienceagainstclimateshocks(includingthroughtheinsurancesector).Layeredclimatedisasterriskfinancingcanthenalsobeputintoplacetocoverthehighfrequency,lowdamageeventsthroughfiscalfundstolowfrequency,highimpacteventsthroughmarkettransferproducts,suchascatastrophebondsandinsurance.•Climateandenvironmentalriskmanagementbythefinancialsector:Climatechange,combinedwithotherfactors,suchasbiodiversityloss,createnewrisksforfinancialstabilityandthelackofunderstandingorawarenessofclimateriskscanalsodelayfinancingforclimateaction.Sincetheperceivedlevelofriskhasadirectimpactoninvestmentdecisions,managingclimaterisksthroughfinancialsupervisionandincreasingawarenesscanplayacriticalroleinchangingfinancialbehavioranddrivingcapitaltowardsclimategoals.•Regularlyassessandmonitorclimateandenvironmentalfinancialrisks.Centralbankscanbuilditsinternalcapacitytorefineclimateandnatureriskscenarioanalysis/stresstestingovertime.Otherfinancialregulatorscanalsoconductmoresimplifiedclimateandenvironmentalriskassessmentsforpensionsandinsurers.•Integrateclimateandenvironmentalrisksintothemicro-supervisionofbanks,insurers,andpensions.Centralbankscanbuildcapacityinsupervisoryteamstoensurethatriskmanagementpracticesareadequatelyadoptedbybanks.Therearealsoneedsforissuingguidelinesforpensionsandinsurers.•ContributetoandgaininsightsfromtheNetworkforGreeningtheFinancialSystem(NGFS)taskforceon‘biodiversitylossandnature-relatedrisks”.Countriescanincreasetheirunderstandingofnature-relatedrisksandmethodologies,data,andscenariosforimprovingriskassessment.NotonlywouldthisworkenablemoreinsightsAssessmentandOptionsAnalysisofClimateandNatureFinancingInstrumentsandOpportunities86.ThewayaheadMobilizingfinancingforclimateandnatureatscalerequiresacomprehensiveapproach,wherecountriesenhancecoordinationandinstitutionalcapacityandeffectivelyengagetheprivatesectoranddevelopmentpartners.Intheneartomediumterm,countrieswillneedtomaximizegrantsandconcessionalfinancingtohelpde-risknatureinvestments,orprovidepotentiallyhigherreturns,forprivatecapitaltoflowtonature-friendlyinvestmentoptions.Aspartofthetransitiontowardsclimateandnature-smartfinance,thereisakeyroleforenhancedknowledge,data,technology,anddecision-supporttools.Countriescanpromoteandfacilitatethesystematicincorporationofclimateandnature-relatedrisksandopportunitiesintoinvestmentdecisionsofpublicinstitutions,financialinstitutions,andcompanies.Improveddataandanalyticscansupport“greeningfinance”bydocumentingtheeconomicandfinancialcostsofinaction,andbyunderpinningassessmentsofalternativepolicyoptionstore-orientfinancetowardsimprovedmanagementofnature.Similarly,“financinggreen”requiresstandardized,widelyacceptedmetricsfornature-positiveoutcomes,towhichfinancingcanbelinked.Knowledgeproducts,technologicaltools,technicalassistance,andfinancingprovidedbydevelopmentpartnerscanhelpcountriesimplementpolicyreformsandinvestmentprograms.Theseeffortscanhelpshiftthebalancefromanoverrelianceonlimitedgovernmentbudgetsandgrantstowardsalongertermandholisticapproachthatattractsdomesticandforeignprivatecapital.Withcorporatesandinvestorsstartingtopaymoreattentiontotheenvironmental,social,andgovernanceaspectsoftheirinvestmentdecisions,countriescanshowleadershipinthisspacebyscalingupnationaleffortsandengaginginglobalinitiatives,especiallyinthefollowingareas:•Enhanceglobalandnationallevelcoordinationtoefficientlydeployacombinationofpolicyandfinancialinstruments,includinggrantsandconcessionalfinancefromdonorsandprivatefoundations.•Strengthennationalfinancialandinstitutionalcapacitytomobilizefinancetosupportpriorityclimateandnatureinvestments,includingstandardizinguseofmonitoring,reporting,andverificationsystemsandbuildingcapacitytoleverageinnovativepolicy,debt,andnon-debtinstruments.•Developandpublishastrategyorroadmaptoidentifyprioritiesforclimateandnaturefinanceandclarifyrolesandresponsibilities.Aclimateandnaturefinancestrategycansetacountry’sstrategicprioritiestostimulateprivateandpublicfinanceandprovideabroaderpictureofhowclimateandnaturefinanceneedswillbecoveredbydifferentsources.•Prioritizeandsequenceaportfolioofinvestmentsbasedonthecountry’sstrategy,andconsideringclimate/biodiversitytargets,macro-fiscalsituation,debtmanagementstrategy,andaccesstocapitalmarkets.Thisprioritizationcanbuildonamappingexerciseofallsourcesofconcessionalfinancingfromdevelopmentpartnerstoidentifyallconcessionalresourcesthecountryiseligibleforwhichcouldbemobilizedtoreducetheclimateandnaturefinancinggap.•Initiateprogramstopilottestandscaleinnovativeinstruments,especiallythosethatdonotaddtosovereigndebtandperformance-basedfinancing(e.g.,includingcarbonmarkets,outcomebonds).•EstablishMRVframeworkstoprovideaclearviewofdomesticandinternationalfinancialflows,trends,sources,andgoals.9Annex1.OverviewofpublicandprivatefinancingoptionsFinancinginstrumentFinancingsourceMainpurposeBeneficiaryPotentialsupportfromauthoritiesPublicGrantsDonors,philanthropiesSupporttechnicalassistance/policywork,climateprojectsthatarenotcommerciallyviable,aswellasprogramsthataccelerateprivateinvestments(e.g.,de-riskingorblendedfinance).Governmentprojectpipeline,privatesectorWorkwithdonorsandotherdevelopmentpartnerstoapplyforgrants.ConcessionalfinanceDonors,philanthropiesBringdownthecostsoffinance.Helpleveragetheprivatesector(e.g.,viablendingwithsemiornon-concessionalloans).Governmentprojectpipeline,privatesectorWorkwithdonorsandotherdevelopmentpartnerstoapplyforconcessionalloans.Sovereigngreenandsustainability-linkedbondsDomesticandinternationalinvestorsMobilizefinanceforthecentralgovernmenttofinanceorre-financeclimateprojects.GovernmentprojectpipelineAssessgovernmentappetiteandcapacitytoissuebond,includingabilitytocomplywithfixedcosts(e.g.,monitoringandreporting).PrivateClimateriskmanagementbythefinancialsectorNotapplicableEnhancefinancialresiliencetoclimateshocks.Indirectlydrivecapitaltowardsclimategoalsbymainstreamingclimateriskconsiderationsinlendingandinvestmentoperations.FinancialinstitutionsMonitorclimaterisksforthefinancialsector.Ensurebanks’compliancewithclimaterisksupervisoryguidance.Considerdevelopingsimilarguidancefornon-bankFIs.ClimatefinancestrategyNotapplicableDefinehowshortandlong-termfinancingwillbemobilizedtoimplementthecountry’sclimategoalsCross-cuttingBringtogetherrelevantstakeholderstoidentifyprioritiesandclarifyrolesMarkettransparencyNotapplicableHelpstakeholdersidentifygreenassets,projects,andcompaniesCross-cuttingEnhanceclimatedisclosures.ConsideraclimatefinancetrackingsystemGreenNDBNDBAddressmarketbarrierstoprivateinvestments(e.g.,longpaybackperiod)andsupportinvestmentsinunderservedareas(e.g.,adaptation)Governmentprojectpipeline,privatesectorAssesstheappropriatedesignstructureforgreeningNDB,developaroadmapforimplementation(e.g.,settingclimatetargetsforNDB)LoanmarketforclimateactionBanksScaleprivatefinanceforclimateactionBankclientsOfferde-riskinginstruments,issuegreenloanguidelinesCorporategreenorsustainability-linkedbondsCapitalmarketsScaleprivatefinanceforclimateactionIssuersofbondsIncentivemechanismstoencourageuptakeofgreenbonds(e.g.,aggregation,guidelinestoinvestors,capacitybuilding)DisasterriskfinanceandInsurancemarketMobilizeprivatecapitalandexpertiseforclimateadaptationFarmersandotherfirms/individualsthatarevulnerabletoclimateshocksDraftphasetwoofthedisasterriskstrategy,implementclimateinsuranceprograms,exploretheuseofcatastrophebondandinsuranceCross-cuttingCarbonmarketBuyers(e.g.,corporateswithnetzerotargets)MobilizeadditionalfinancingfrompublicandprivateprojectsProjectdevelopers(couldbepublicorprivate)Developthelegislation,infrastructure,andinstitutionalarrangementsforcarbonmarketsAssessmentandOptionsAnalysisofClimateandNatureFinancingInstrumentsandOpportunities
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