Nature-based solutions (NbS), such as reforestation, wetland restoration, regenerative agriculture, and forest carbon projects, often face higher financing costs than traditional infrastructure or energy assets. When key risks remain unclear late into the investment process, lenders and investors price in that uncertainty. Nature projects are not inherently uninvestable; rather, insufficient or delayed due diligence leaves risk unresolved at the moment capital is priced. The result is higher required returns, stricter loan terms, and a more expensive cost of capital.

This article explains why uncertainty increases financing costs in nature-based projects and how thorough, early-stage due diligence can materially reduce the cost of capital.

Why Capital Becomes Expensive in Nature-Based Solutions (NbS)

Nature projects frequently carry a higher cost of capital because their risk profiles are perceived as elevated. This perception often stems from unresolved information gaps rather than intrinsic project weakness.

Many NbS investments are considered “unbankable” because they:

• Lack long-term historical performance data

• Involve ecological and execution risks

• Depend on emerging markets (e.g., voluntary carbon credits)

• Have long payback periods and uncertain revenue timing

For example, a new forest carbon project may rely on future carbon credit sales. However, both credit issuance volumes and market prices are difficult to forecast with precision at financial close. Traditional lenders are accustomed to contracted, predictable cash flows and therefore apply a risk premium when outcomes are uncertain.

There is also a structural mismatch between investor expectations and project realities. Institutional investors often seek standardized, scalable deals with relatively short time horizons. In contrast, nature-based solutions typically require:

• Long-term ecological performance

• Context-specific project design

• Community engagement

• Adaptive management over time

Crucially, a meaningful share of perceived risk in nature-based projects stems from gaps in early-stage analysis rather than inherent project weakness. When ecological assumptions, regulatory considerations, land tenure arrangements, or community dynamics are not fully assessed before capital structuring, some uncertainty can remain. In those cases, investors may take a more cautious stance, reflecting that uncertainty in pricing or structuring decisions.

In practice, early-stage projections in emerging sectors can sometimes prove optimistic as methodologies and data continue to evolve. For example, Xilva’s review of over 300 nature-based projects found that many projects required refinement of their carbon modeling assumptions, with a portion of identified risks linked to modeling approaches. This reflects a young and rapidly developing market rather than systemic failure. Strengthening early due diligence and continuously improving modeling standards helps address these gaps, enabling investors to price risk more accurately and support projects with greater confidence.

How Lenders and Investors Price Uncertainty

A core principle of finance is that risk and uncertainty increase required returns. When project risks are opaque or poorly quantified, investors apply a higher risk premium to compensate.

This premium shows up as:

• Higher interest rates on project finance loans

• Higher target internal rates of return (IRR) for equity

• Tighter covenants and reporting requirements

• Additional collateral or guarantees

• Reduced leverage

Conversely, transparency and credible risk management reduce financing costs. An OECD study on responsible business conduct found that companies with stronger risk identification and management processes benefit from improved analyst recommendations and a lower cost of capital. Due diligence increases transparency, which reduces perceived risk.

In the NbS context, this means that if a project can clearly demonstrate:

• Robust ecological modeling

• Credible revenue projections

• Clear land tenure

• Defined stakeholder engagement plans

• Identified mitigation strategies

then investors do not need to “pad” pricing for unknown risks.

If instead critical variables remain unresolved—such as uncertainty in carbon credit issuance, unclear land rights, or exposure to regulatory shifts—capital providers will take a conservative stance.

A recent survey of 72 nature-based project developers illustrates this dynamic. Cost of capital was cited as the single largest source of cost uncertainty in getting projects off the ground—exceeding technical, MRV (monitoring, reporting, and verification), regulatory, or community engagement factors. Developers are particularly concerned about high interest rates and required equity returns, which increase when risk visibility is limited.

In short:

Uncertainty → Higher perceived risk → Higher cost of capital.

Capital markets are pricing ambiguity—not nature itself.

What High-Quality NbS Due Diligence Looks Like

Reducing financing costs in nature-based projects requires rigorous, interdisciplinary, and early-stage due diligence tailored to ecological and climate-driven assets. This goes beyond a checklist exercise and focuses on decision-critical risk factors.

A high-quality NbS due diligence framework typically includes:

1. Early Ecological and Climate Risk Assessment

Evaluate environmental variables central to long-term performance:

• Validation of carbon sequestration models

• Biodiversity outcome assumptions

• Species selection and habitat suitability

• Climate change scenario analysis

• On-site ecological surveys

Grounding assumptions in empirical data increases confidence in projected outcomes. If climate risks (e.g., drought, fire, flooding) are stress-tested early, investors are more comfortable with projected returns.

2. Delivery Model and Revenue Pathways

Examine how the project generates predictable cash flows:

• Verified carbon credit methodologies

• Identified buyers or offtake agreements

• Yield and pricing assumptions for agroforestry or regenerative agriculture

• Market demand analysis for ecosystem services

For example, if a mangrove restoration project depends on carbon credit sales, are methodologies approved and aligned with recognized standards? Are there credible buyers? If revenue depends on sustainable commodities, are production assumptions backed by local data?

Clear revenue validation reduces perceived volatility and lowers required returns.

3. Governance and Stakeholder Engagement

Strong governance structures reduce execution risk. Due diligence should assess:

• Developer track record

• Project management capacity

• Community participation

• Benefit-sharing mechanisms

• Legal agreements with local partners

Nature-based projects frequently succeed or fail based on local stakeholder alignment. Early community engagement reduces reputational and operational risk, which in turn reduces financing risk.

4. Jurisdictional and Regulatory Exposure

Evaluate:

• Land tenure security

• Environmental compliance

• Required permits and approvals

• Political and regulatory stability

Legal clarity is essential. Projects in jurisdictions with evolving land-use laws or unclear tenure systems require careful structuring, potentially including political risk insurance or alternative ownership models.

Why Timing of Due Diligence Matters

The quality of due diligence matters—but timing matters just as much.

If serious risks surface after financing terms have been priced, outcomes typically include:

• Higher interest rates

• Renegotiated equity returns

• Stricter covenants

• Reduced leverage

• Deal delays or cancellations

For example, if a soil restoration project discovers land disputes late in structuring, or a carbon project realizes its credit yield is materially lower than forecast, financing must be repriced. Mid-stream renegotiation increases transaction costs and erodes trust between sponsors, communities, and investors.

Early, comprehensive due diligence allows:

• Project redesign before capital pricing

• Appropriate risk allocation

• Realistic financial modeling

• Transparent communication with investors

When risks are identified and mitigated before term sheets are issued, capital can be priced closer to the true underlying risk.

The Strategic Link Between Due Diligence and Lower Cost of Capital

Uncertainty is expensive. Nature-based solutions often face a trust gap with traditional capital markets because of unresolved questions about ecological performance, revenue durability, and regulatory exposure.

Better due diligence is the bridge.

By investing in rigorous early-stage due diligence, project developers can:

• Reduce unknowns

• Increase transparency

• Improve investor confidence

• Lower required returns

• Unlock cheaper project finance

Lower financing costs make more nature-based projects economically viable. As more projects succeed and build performance track records, the perceived risk of the NbS asset class declines further—creating a virtuous cycle of confidence, capital inflow, and scale.

Ultimately, capital markets should price fundamentals—not uncertainty. Achieving this requires upfront investment in risk assessment, assumption validation, interdisciplinary expertise, and transparent disclosure.

The payoff is substantial: lower cost of capital, scalable conservation and restoration, and stronger long-term investor confidence in nature-based solutions.

In Part 2, we will explore how strong early due diligence reshapes contracts, investment structures, and long-term performance—further de-risking nature investments and continuing to reduce financing barriers.