Bridging the Gap: Key Learnings from Due Diligence in Forest and Nature-Based Solutions

Feb 25

As the world grapples with climate change, biodiversity loss, and deforestation, businesses and financial institutions realise that the management of nature-related risks and opportunities is a component of the ability to generate long-term financial returns [1]. Nature-based solutions (NbS) and natural capital have quietly emerged as a new asset class. However, ensuring the credibility and effectiveness of NbS investments requires thorough due diligence.

At Xilva, our mission is to facilitate investments in high-impact nature-based projects by using due diligence as an enabler and helping investors to select vetted, scalable opportunities. Through our experience conducting due diligence on global NbS projects, we have identified key lessons and best practices that can help investors, policymakers and project developers bridge the gap between ambition and impact.

The Importance of Rigorous Due Diligence in NbS Investments

Investing in NbS presents unique challenges. Unlike traditional financial or infrastructure investments, these projects require a nuanced understanding of ecological dynamics, community engagement, and long-term sustainability. Robust due diligence ensures that projects deliver on their promises of carbon sequestration, biodiversity protection, and community benefits.

A study by the World Resources Institute (WRI) found that well-designed NbS projects can provide 37% of the cost-effective carbon mitigation needed by 2030 to keep global temperature rise below 2°C. However, poorly executed projects risk greenwashing, financial underperformance, and negative social impacts.

A robust due diligence process helps answer critical questions:

Does the project deliver genuine climate and biodiversity benefits?
Are local communities engaged and fairly compensated?
Is the financial model sustainable, and does it offer returns for investors?

To provide insights to both investors and nature-based project developers, we analysed a sample of 288 projects assessed under the Xilva GRADE framework over the last 3 years, and published a study Navigating Risks & Realizing Opportunities in Forest & Nature-Based Investments. These insights and key learnings are crucial for understanding the complexities of managing projects, as well as for identifying areas where improvements can enhance project feasibility, outcomes and sustainability.

Xilva also shared these findings and best practices in a webinar. Watch the webinar here, or read the summary we have put together for you:

Key Learnings from Due Diligence in NbS

1. The Need for Transparent and Reliable Carbon Accounting

One of the biggest challenges in NbS investments is ensuring that carbon credits generated by projects are credible. A lack of transparency in carbon accounting has led to market skepticism and a demand for better verification mechanisms.

For example, our due diligence process identified projects that overestimated their carbon sequestration potential, highlighting the need for third-party validation and robust monitoring systems.

2. Strong Community Engagement is Non-Negotiable

Successful forest projects do more than just plant trees; they integrate local communities into their design and execution. Projects that fail to consider local needs risk facing resistance, legal disputes, or unsustainable outcomes.

A study by the International Union for Conservation of Nature (IUCN) found that projects incorporating strong community governance structures are 20% more likely to achieve their conservation and financial goals. For instance, the restoration of mangroves in the Philippines, where local fishing communities were actively involved, has led to increased fish stocks and improved livelihoods.

Case Study: Social Issues and Red Flag in Agroforestry
One large-scale project in West Africa we assessed failed to consider certain migrant communities not recognised by the law of the country to be self-determined rights-holders. In effect, the project ignored them as a people that should be involved in Free, Prior and Informed consent of the project activities, and failed to take into consideration any rightful compensation activities in their financial plans. This was an erroneous point of departure for the project's social acceptance and long term success.

3. Long-Term Financing Models Are Needed

Traditional short-term funding mechanisms are often incompatible with NbS projects, which require decades to reach full maturity. Investors must shift from short-term profit expectations to long-term sustainability goals. This requires patient capital and risk mitigation strategies, including diversified investment portfolios and insurance mechanisms.

For example, the LEAF Coalition, backed by corporations and governments, is facilitating long-term private & public investment in forest conservation through carbon markets.

4. Leveraging Technology for Better Monitoring and Reporting

Advancements in remote sensing, satellite imagery, and AI-driven analytics are revolutionizing how NbS projects are monitored. By integrating these tools, investors can receive real-time updates on forest growth, carbon sequestration, and biodiversity health.

Looking Ahead: Strengthening Trust in NbS Investments

As the NbS market matures, and natural capital turns mainstream, stronger regulatory frameworks, standardized reporting, and increased collaboration between stakeholders will be key to scaling impact. Key action points include:

Strengthening policy frameworks: Governments must integrate NbS into national climate and biodiversity strategies.
Enhancing financial innovation: New funding mechanisms, such as nature performance bonds, can attract private investment.
Improving impact measurement: Investment in satellite monitoring and AI-driven analytics can enhance data accuracy.

Nature-based Solutions offer a powerful pathway to addressing global challenges, but they require rigorous due diligence, long-term commitment, and inclusive governance. By applying these key learnings, we can build a future where investments in nature lead to real-world climate resilience and sustainable economic growth.