In a world grappling with climate change and rapid urbanisation, the role of infrastructure in driving economic and social development cannot be overstated. Global infrastructure needs are immense, with Oxford Economics estimating that  a staggering $3.7tn investment is needed annually. That is larger than the annual GDP of India, the fifth largest economy in the world. To close this gap, countries must increase the proportion of their GDP dedicated to infrastructure. Yet considering that infrastructure is responsible for 79% of total greenhouse gas emissions, according to the United Nations Office for Project Services, it is imperative that new projects not only bridge the infrastructure gap, but do so sustainably and with a low carbon footprint.

One innovative solution lies in harnessing nature itself, through nature-based infrastructure (NBI). Historically known by various names like green, ecological or natural infrastructure, NBI leverages natural or modified ecosystems to deliver services conventionally provided by traditional — or ‘grey’ — infrastructure. For instance, restored wetlands naturally treat wastewater and improve water quality, while green roofs have the potential to manage stormwater and mitigate urban heat effects in cities. On the coast, sand dunes serve as natural barriers against coastal flooding and erosion, and degraded ground inland can be restored to improve soil quality and water retention. In the past, we turned to grey solutions to these problems: seawalls, concrete drains, treatment plants and dredging. However, NBI offers a green alternative. We can work with nature, to close the infrastructure gap in an eco-friendly and cost-effective manner. 

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• SDG bonds: private funds, public goals
• Stronger banks are key to closing the climate finance gap

Financing green bridges

Despite its benefits, NBI remains underutilised. Why is it not more widespread and how can it be scaled up to meet global infrastructure needs? The challenges are multifaceted. As it is still an emerging area, there is a lack of awareness among project proponents, coupled with concerns over operational and financial performance, perceived risks and the long-term investment horizon. But the most significant hurdle is the absence of traditional revenue streams. Unlike conventional infrastructure, the benefits of NBI, such as ecosystem services, are often intangible and not directly monetisable. For example, a wetland might contribute to the unique taste of an aquaculture company's seafood, or dunes might protect coastal resorts from flooding — benefits that have traditionally been enjoyed free of charge.

To address these challenges, innovative financial solutions are essential. Outcomes-based financing, also referred to as results-based financing, is emerging as a promising approach. Using this model, payments are contingent upon achieving predefined and measurable environmental or social outcomes. This shifts the focus from mere activities to tangible results, thereby enhancing efficiency and effectiveness. Importantly, it also transfers the risk of project failure from the outcome buyer to the project developer. If the project does not achieve the desired outcomes, the developer bears the financial risk.

Let’s take an example.  In a region with heavy agricultural activity, runoff from farms often carry high levels of phosphorus and nitrate, often causing water source pollution which can require expensive upgrades to water treatment plants. Alternatively, the municipality could pay a developer to improve water quality using NBI. If the nutrient levels decrease to a predetermined value within a set timeframe, the developer would receive the pre-agreed payment from the municipality. This allows a developer to borrow funds to implement the project, with the expectation of future payment upon successful outcome delivery.

This is just one illustration of the many ways in which outcomes-based financing can make NBI projects viable and attractive to investors. The potential of NBI, when combined with innovative financing solutions, could be transformative to landscapes and communities around the world as we face the climate crisis. It offers an opportunity to meet global infrastructure needs while ensuring environmental sustainability.

As we stand at the crossroads of sustainability objectives and developmental needs, embracing outcomes-based financing for NBI could be a real game-changer.  The hope is that soon NBI will emerge as a sought-after asset class, attracting investment and contributing to a low-carbon, environmentally friendly infrastructure landscape.

David Uzsoki is the sustainable finance lead at the International Institute for Sustainable Development

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