Investing in Nature-based solutions is future-proof and reduces financial risks

By Selnes, Trond, Monica van Alphen, Marieke de Haas, Tim van Hattum, Nafsika Makri-Makridou, Sabine van Rooij, Onno Roosenschoon and Marjolein Sterk

All in all, quite a challenge. Fortunately, many people try to be on top of it. In fact, politicians and administrators are already making decisions about the developments every day but the natural system is not or hardly taken into account. A shame, because solutions in which we work together with nature – ‘nature-based solutions (NbS)’, see box – offer a huge opportunity for the Dutch society and the economy.

Many professionals in the financial sector know little about NbS and therefore they do not seek for the added value. Currently, the limited willingness to consider these solutions seriously is related with our tendency to short-term thinking. Because in the short term, the costs of NbS often seem higher – especially when the climate costs of current solutions remain hidden.

For the long term, todays solutions are not sufficient but NbS could be the smartest and cheapest choices. So, the task is to make the benefits and costs of NbS more transparent and the often hidden (climate) costs of the traditional solutions should be taken into account. A challenge is that the costs for NbS are often paid by a few parties, while the benefits are for the entire society.

In financing NbS there are 5 trends:

1. Because every day climate risks are increasing, a long term perspective is increasingly important in spatial planning.
2. When investing people do not take into account the return on investment on the long-term.
3. NbS are emerging, but the benefits are often not yet noticeable.
4. Short-term thinking is the largest barrier to invest in NbS.
5. Only joint effort can support the shift from short-term thinking to long-term thinking.

In order to achieve change, it is crucial that the financial sector comes into action. This is also in the interest of the sector itself. Why and what can we do to change the short-term view will be explained in this article.

Many people think climate risks are a problem for the future. Measures to keep the Netherlands livable are often considered on the short term. How much do they cost at this moment and who should pay for it? In addition, we pay little attention to where we ultimately want to go on the long term. There is also little attention for the profits of measures taken.

While in the Netherlands we are making – and will make – major investments because of climate change. For example dike reinforcements, transition to sustainable energy, increasing the livability of cities and countryside, safeguarding water quality and making agriculture more sustainable. In addition, climate change entails significant financial risks. Think of damage caused by natural disasters, such as the floods in Limburg (2021) or the streets and houses that were recently flooded as a result of extreme precipitation (summer 2024).

Challenges are connected

Because all these challenges are related to the natural system, they are connected. Investments and interventions in one system have consequences in the other. In other words: problems with biodiversity or the quality of soil and water, are connected to challenges in agriculture, housing, infrastructure and industry.

To keep the Netherlands prosperous and healthy, we need to make the entire system resilient to extreme climate conditions. If we design nature-inclusive villages and cities more people can live in save places resistant to water. Currently almost 1 in 3 Dutch people live in flood prone areas and we still expand housing in those areas. It is happening because hardly anyone pays sufficient attention to climate risks: not the bank, not the supervisor, not the government – ​​and therefore ultimately not the homeowner either. With a focus on NbS, areas can absorb more water and more people can live safely as a result.

This is just one example. Though the message is clear: if we continue to ignore the role of the natural system, the future can become very expensive. Floods, droughts and subsidence are already causing major damage. When we analyze the effects of NbS on broad prosperity, we will be able to recognize benefits more clearly and that helps to support investments.

Too expensive, or not?

People think that climate measures are ‘too expensive’. We are indeed talking about overwhelming amounts of money. The Climate Policy Plan lists annual expenditures of 4 to almost 7 billion euros and the Dutch government has been talking about a new Climate Fund of 35 billion euros (General Audit Office, 2023).

But when is it ‘too much’? For comparison: in the Netherlands we spend 3.6 billion euros on sweets and snacks every year (Food & Agri, 2022). If we continue to do this until 2050, the total costs are around 100 billion euros.

Why does this feel different? All those expenses on sweets are a retrospective sum of countless small expenses by individual people. And they deliver short-term moments of pleasure when you are enjoying a delicious chocolate bar. NbS and climate measures are the opposite: the costs are for everyone and visible all at once. Moreover, you do not see the results immediately. The fact that we save money through NbS on the long term is more difficult to explain.

In addition, the benefits of NbS cannot usually be expressed in monetary terms – think of better drinking water, better housing and a healthier living environment. While we do feel the costs of measures immediately.

Every year in the Netherlands we earn 1,000 billion euros (GDP) and our revenues grew by 27.8 billion euros in 2022 compared to the previous year. If the economy grows by 1 percent, that's 10 billion euros extra. So we can safely continue to snack for 3.6 billion euros. But what do we do with the rest of the money? It's time to think about that.

We usually don’t look forward a hundred years. While the investments’ lifespan shows that what we do today will have consequences for at least the coming sixty to eighty years. Because if you spend money on new sewers, houses, dikes or roads, you will be able to use them for decades (see table 1).

Moreover, nature needs about thirty years to develop. If you want ‘more nature’ to make the environment more resilient it cannot be arranged in one day. In fact, if you consider that planning processes in the Netherlands often take five to fifteen years, a hundred years doesn’t seem that far away. Though investments that we make in 2030 will often be experienced around 2060.

We are already spending billions

The Netherlands is expected to spend hundreds of billions of euros on infrastructure, housing, energy transition and climate adaptation by 2050 (see figure 2). Why are these such large amounts?

• Infrastructure: the Netherlands is already spending around 9 billion euros on the construction and expansion of roads, railways, cables, pipelines, sewers, ports and waterways. And new functions are being added, such as the expansion of data centers and the data and energy infrastructure. Many bridges, locks, viaducts and tunnels will need to be repaired or replaced in the coming years.
• Housing construction: in 2050 the Netherlands will have approximately 17.1 to 21.6 million inhabitants (CBS, 2020). Until 2040, we will have far too few homes – the shortage is approximately 1 million. This is due to the increasing number of single-person households, immigration and the fact that only few houses were built during the financial crisis after 2008.
• Energy transition: the amount of 189 billion euros is calculated on the basis of the objectives in the Climate Agreement. This includes agreements on the transition to sustainable energy and making industry, homes and offices more sustainable.
• Climate adaptation: these are costs to protect ourselves against the consequences of climate change. Think of adapting villages and cities so that it remains sufficiently cool in hot summers. Or measures that water can drain away when it rains extremely hard or rivers flood.
• Nature: around 13 to 15 percent of the Netherlands is nature. Through the Programmatic Approach to Large Waters (PAGW) and Natura 2000 management plans, the central government is investing almost 4 billion euros in nature until 2050. A relatively small amount, compared to other investments.

And agriculture?

It is difficult to say how much money we are going to invest in agriculture, because there are no national figures for this. What we do know is that agriculture takes up more than half of the Dutch surface area (54 percent). And the sector also faces major challenges, like efficient energy use, the transition to a more sustainable agriculture.

The central government is working with water boards and other parties to combat salinization, reduce soil subsidence and climate adaptation. Regional governments and the Delta Fund together made 0.8 billion euros available to combat drought damage. The sector also contributes to investments in business operations.

Many private investments are risky

So far, mainly governments have invested in NbS. Of the total amount invested in such solutions in Europe, 91 percent comes from governments. Private parties are hardly participating.

What do Dutch financial institutions invest in worldwide? And are these investments future-proof? The figures (DNB and PBL, 2020) are worrying:

• 510 billion euros in outstanding loans to companies that are (very) dependent on the ecosystem - such as fertile soil, good quality water, pest control, wood and crops. This is approximately 36 percent of the Dutch investment portfolio.
• 96 billion euros in financing is outstanding to companies that are involved in environmental controversies, or that damage the natural system and biodiversity.
• 97 billion euros has been invested in activities that lead to deforestation.

In the Netherlands we also see that too little money is going to nature, the environment and the climate. The EU estimates that the Netherlands will spend too little on environmental measures in the coming years (see table 2).

Climate damage in the Netherlands

The pressure to invest differently increases when we look at the harmful consequences we have to deal with. According to the Dutch Association of Insurers, the Dutch climate damage up to 2050 will be between 77.5 and 173.8 billion euros. And it is estimated that approximately 1 million homes in the Netherlands have foundation problems. That amount of damage could rise to 60 billion euros in 2050 (AFM, 2023).

Climate change risks are linked to other interventions in the physical living environment, according to the Netherlands Authority for the Financial Markets (AFM). Doing nothing already costs a lot of money at this moment. For example, about 59 percent of the Netherlands is vulnerable to flooding. In 2021 parts of the province Limburg flooded and the damage was around 1.8 billion euros (AFM, 2023). Between 2000 and 2010, flood damage in the EU averaged €4 billion per year. By 2050, this is estimated to be €23 billion annually – almost six times as much (!).

Unaware of the risks

We should already include these costs now, because they are very likely. But the risks of flooding and foundation problems are hardly included in house prices and homeowners are often not insured. Moreover are also no plans to insure or compensate for these costs.

Though many homeowners do not know that they are running these risks. As many as 85 percent of Dutch people who buy a house are not aware of the foundation risks. And 40 percent think they are insured against damage caused by flooding (see figure 5). An analysis of sales texts on real estate agent website Funda shows that the quality of the foundation is mentioned in the text in only 2.2 percent of advertisements (Hommes et al, 2023).

Positive signals

However, there are also positive signals. For example, the Dutch government is releasing 30 billion euros for projects that reduce CO2 emissions. With this scheme, companies and households can receive a contribution when they take energy-saving measures. For example, if they purchase a heat pump or solar boiler, or better insulate their home or office building.

In addition, the Netherlands is proposing new measures to tackle the overload on the electricity grid and to make its expansion easier. It should also be easier to obtain a permit for renewable energy projects. The Netherlands will receive 0.73 billion euros from the EU for these measures, on top of the 4.7 billion euros that our country already received for the Recovery and Resilience Plan (see table 3).

Another example: from the Just Transition Fund (JTF), the EU awarded 0.62 billion euros to six Dutch regions with additional challenges for a climate-neutral economy: Groningen-Emmen, IJmond, Groot-Rijnmond, West-Noord-Brabant, Zeeuws-Vlaanderen and Zuid-Limburg. In the EU knowledge programme Horizon 2020, the EU also invested EUR 0.29 billion in knowledge projects focused on NbS. And recently the Triodos Bank announced its commitment to provide at least EUR 500 million in investments, loans and contributions to the nature-based solutions sector by the end of 2030 as part of its biodiversity targets.

In the Netherlands, the focus on investments is often on the short term. What does an investment yield right now – and especially for the person who invests? NbS challenge this way of thinking. Because the costs and benefits of the solutions are not for the same party. Moreover mainly the future generations benefit while we have to invest now.

Since the policy letter ‘Water and soil driven’ (November 2022), NbS are part of the Dutch spatial policy. But that does not make them routine. Luckily, the visions Nederland in 2120 and Europe in 2120 give NbS a boost. These future perspectives are widely adopted by the media, politicians, policymakers, companies and citizens. Apparently there is a need for a positive future story.

Cultural change

The 2120 visions are not a blueprint. Rather, these stories are a provocative perspective, a means to stimulate discussion about how we shape the future together. But every time the visions are presented, questions arise about how we can achieve this. What should we do now and in the future?

In Dutch spatial policy, the emphasis is now on technocratic, ‘grey’ solutions. In other words: on concrete and steel. Flooding? Then we build locks and dams or raise the dikes. That is how we have always done it – and with such solutions, we have become wealthy in the Netherlands. That wasn’t a problem for a long time, but it is now time to take a different path in which we cooperate with nature.

Making different choices requires learning to look at spatial planning differently: from technical-functional feasibility to a long-term focus on the natural characteristics of water and soil systems. This is a cultural change according to engineering consultancy Sweco (2023). A matter of looking critically at our beliefs and rethinking possibilities.

Policy on NbS in the Netherlands, Europe and beyond

Netherlands

The Climate Act (2019) states that by 2050 we must emit 95 percent less greenhouse gases than in 1990, and by 2030 55 percent less emissions. Policy to achieve this is on its way. Take the National Climate Adaptation Strategy (NAS), the Delta Programme, the National Environmental Vision (NOVI) and the Environmental Act.

In addition, there are all kinds of partnerships like the Sustainable Finance Platform and the Natural Climate Buffers Coalition. Other examples are Regional Deals, City Deals, Town Deals and the National Growth Fund.

European Union

The European Union stimulates NbS: in 2023, it contributed no less than 0.66 billion euros to 76 projects in which 1,391 partners from 71 countries worked together. The Green Deal contains strategies on biodiversity, climate adaptation and food (Farm to Fork). More than one third of the EU Recovery and Resilience Facility (37%) is for the green transition.

International (outside the EU)

During the UN climate summit COP27[SM6], at the end of 2022, attention was paid to NbS. See also the UN Kunming-Montreal Biodiversity Agreement, the Intergovernmental Panel on Biodiversity and Ecosystem Services (IPBES), the Intergovernmental Panel on Climate Change (IPCC) and the UN environment program.

Want to know more?

• The Dutch government has collected useful tools and analyses in the field of NbS.

Increasing involvement – ​​next the financial sector

There is a need for a perspective on how to trigger NbS? Insurers and banks are also paying more attention to the consequences of climate change and collaborations are emerging. For example, the Ministry of Infrastructure and Water Management is investing 0.11 billion euros in a ten-year project into NbS via the National Growth Fund. This Growth Fund project is a broadly supported collaboration – exactly the direction we want to go!

In short, more and more private parties are becoming involved. Policymakers, politicians, planners and the general public are aware of the consequences of climate change – and understand that short-term thinking is finished. Experts from ministries, provinces, knowledge institutions and consultancy firms work together on an overarching approach for the quality of soil and water, land and air. Academics work on pathways to a future with NbS. In short: cracks are appearing in the old way of thinking.

Towards a NbS investment agenda

A NbS investment agenda is needed for a nature-inclusive future, with money and considerations based on reducing risks and focusing on the benefits for society. Choices for how we spatially organize the Netherlands will then be the result of underlying value patterns and risk assessments. Professionals work together on innovation, based on their vision and knowledge of the natural system.

4. Short-term thinking is persistent – ​​and it hinders major investments in nature-based solutions

Why is thinking on the long-term often not yet possible? Simple: short-term thinking is very persistent, it is not just a matter of changing your mindset. Short-term thinking is interwoven in all decision-making processes, in the calculation models, in the stories we tell each other. In short, our entire system is permeated by it. Just look around you. The news is mainly about the costs of climate change. Then a concerned citizen says: ‘we will definitely have to pay for that’. Banks and politicians see these images and are influenced by them. Professionals who make decisions about investments often receive inadequate information about the benefits of NbS. And private parties wait for the government, instead of taking action themselves.

Why the financial sector can make a difference

If we do not tackle such barriers, we will postpone the transition. That means that we will soon face even higher costs (RLI, 2022). It is crucial that the financial sector also commits to the transition to a sustainable economy. This is the conclusion of the Council for the Environment and Infrastructure that spoke with experts from this sector.

Banks, insurers and pension funds often see sustainability as a side issue. That has to change, because these parties are essential to make the Netherlands future-proof.

Why can especially the financial sector make the difference? 3 major barriers play a role in this sector:

1. Investment frameworks prefer the short term over a long-term vision

The fact that unsustainable investments ultimately have greater risks remains invisible. The long-term benefits of sustainable investments are also barely discussed.

The financial sector is still strongly focused on financing common activities in the existing economy. And on common processes in the financial markets. The calculation models that are used are derived from existing companies.

Suppose you want to do something with hydrogen. Then the current calculation models do not provide a realistic picture. But you cannot change those models, because no data is yet available. This means that a different consideration is required. A company that is performing well now may be in a very different position in 10 years in a world that is changing rapidly…

The transition to sustainable financing means that we have to make the unconventional common. This can be done by anchoring sustainability in the business model.

2. Supervisors hardly look at how sustainable investments are. Central banks look at the stability of the financial system. But what does ‘stability’ mean? Within the current standard, the capital requirements for financial institutions are unfavorable for sustainable investments.

Non-sustainable investments are relatively advantageous for banks and insurers within this system, because negative environmental effects have not yet been taken into account and sustainability risks do not lead to higher capital requirements. Note: in the long term, non-sustainable investments cause higher risks for the financial system. While sustainable investments ultimately have smaller risks (Schoenmaker & Tilburg, 2016).

3. Government bonds are overrepresented in pension fund portfolios

This slows down the transition to a sustainable financial sector. The Dutch pension model works with pension guarantees. Investments in government bonds are a good fit for this, because they can be sold at any time and have little risk. However, such investments hardly contribute to the development of a sustainable economy. Certainly in comparison with more targeted investments.

How exactly this will change with the introduction of the new pension law (2023) is still unclear. However, the Council for the Environment and Infrastructure (RLI) expects that government bonds will remain overrepresented in the investment portfolios of pension funds. It would help if pension funds started making long-term investments. For example in sustainable real estate and infrastructure, heating networks, energy storage or hydrogen transport.

Another barrier: lack of central organization

There is another major financial barrier: our governmental policy in the field of sustainable financing is fragmented. In the Netherlands, we do not have a central, national investment institution that helps set up major investments in the transition to a sustainable economy.

If banks, pension funds and other financial institutions do not make money available for sustainability, the government can partly take that role. The Netherlands has done so but as a result, all kinds of organizations and funds have emerged: from Invest-NL, Invest-International and the Dutch Development Finance Company (FMO) to the Fund for Public Housing.

In practice, this forms a barrier to sustainable and innovative initiatives. It is now complicated for them to claim money, while that money is available. Moreover: because there is no central party, the decisiveness and direction to properly manage and coordinate the various tasks are also lacking.

That is why the RLI advises: set up such a national investment institution. Other European countries already have them. Various funds, such as the Climate Fund, the Nitrogen Fund and the Growth Fund, can be brought together in InvestNL. This new institution is at distance from the government. However, it does receive investments from the government. In addition, it can attract private capital from the market to stimulate sustainable investments.

5. Only joint effort can pull us out of short-term thinking

Look again at the triangles in figure 1. Joint management is needed to straighten the triangle that is ‘upside down’. There is also a need for a Dutch long-term vision in the area of ​​investments: where do we want to go, and why? Both are still missing.

The good thing is: we have already proven that we can do something like this. Dutch people have been working in water management together for centuries to keep the country livable. So we know that and how it can be done.

Towards a social way of governing

Fortunately, more and more tools are becoming available to determine the costs and benefits of sustainable investments. The Growth Fund is an example of a collaboration platform to apply NbS more broadly – ​​and as a standard solution. A national investment institution (see development 4) also helps to attract private capital to stimulate investments in NbS.

In addition, we can use relevant policy frameworks to develop NbS. Think of the National Environmental Vision, the Environmental Act and the National Rural Area Programme (NPLG). NbS have now also been included in the Policy Compass of the Central Government. And they are included in the rules of the Multi-Year Programme for Infrastructure, Spatial Planning and Transport (MIRT).

Towards a prosperous future

We want the Netherlands to maintain its Triple A status in the future. For this, we need a social, inclusive way of governing (governance). A vision can support this: companies and citizens can work together, with the financial sector and the government around the table.

A green, prosperous future requires planning based on cooperation – in which climate risks are taken into account. That will be the foundation of new, green prosperity. This will only succeed if we put a stop to the ‘powerful’ short-term thinking. Because, we cannot say it often enough, that is ultimately the most expensive solution.

What to do?

We have the following recommendations:

• The coming years the Netherlands will invest a lot of money in spatial planning. These billions of euros have already been planned. But how do we spend this money? By revising the investment policy now and opting for NbS, we invest much more intelligently.
• It is important that governments, businesses, knowledge institutions and NGOs together arrive at a positive vision of the future, which endorses the long-term benefits of NbS. Such a story clarifies why NbS have such enormous social added value.
• Banks, insurers and other financial institutions could also benefit from developing their own vision and role in the transition process towards more NBS-investments.
• Private investors are crucial to take NbS to a higher level. These solutions also have added value for them, because they are ultimately cheaper. So increase the attractiveness of NBS by presenting the business case.