Sustainable Infrastructure and Climate Resilience: A Financial Model to Appraise Nature Based Solutions

Abstract

As climate change becomes an increasingly important factor in planning new infrastructure projects, nature-based solutions (NBS) are emerging as a more cost efficient and resilient option. Also known as green infrastructure, incorporating NBS into traditional built-in solutions can mitigate climate hazard impacts and associated costs, such as those caused by flooding, drought, erosion and fires (Browder et al., 2019). NBS can also contribute to increasing ecosystem services with additional co-benefits, including the provision of food, raw materials, tourism, water, as well as water quality and climate regulation and biodiversity and health enhancements (IPBES, 2019). Despite these benefits, NBS are not systematically integrated into infrastructure project design and implementation. There are structural and regulatory challenges as well as methodological and knowledge gaps. Because NBS projects include co-benefits, climate risk scenarios and avoided costs analysis, they need to be assessed differently from traditional financial cash flows analysis. This thesis addresses this gap by developing a financial Excel spreadsheet model to appraise NBS using a discounted cash flow methodology. To develop the model, I reviewed existing frameworks, relevant analytical approaches and applicable methods. Based on this review, the tool was largely developed referencing the World Bank guidelines for project developers to assess benefits and costs of NBS (van Zanten et al., 2023) focusing on: i) hazard risk reduction benefits valuation, ii) co-benefits valuation, and iii) NBS project costs valuation.Real-world validation was achieved by beta-testing the model on four selected infrastructure project case studies. This involved comparing a baseline scenario without NBS to a scenario with NBS implementation, assessing the financial impact on Net Present Value (NPV). Sensitivity analysis explored the following questions: Which project variable most impacted NPV? What was the financial impact of climate de-risking the project (discount rate reduction)? Were costs and benefits adequately distributed between different project participants including private and public agents? Beta-testing the case studies corroborated the potential for the real-world application of the Excel model and its suitability for financially assessing NBS projects. The cases were successfully appraised into the spreadsheet and the results highlighted the positive financial impacts of NBS on all four project NPVs. The sensitivity analysis revealed that the financial relevance of risk-reduction benefits and co-benefits are project specific, varying according to site, technology and environmental and social contexts. Reducing the discount rate by 1% had a significant impact (>10%) on all project NPVs. The sensitivity analysis also confirmed that co-benefits pricing contributed to increasing the project’s financial return, indicating the need for related policies to effectively monetize them. While the Excel model confirmed its applicability, this research came across limitations relating to data availability for NBS globally, as well as challenges to integrating existing datasets in a user-friendly manner, indicating current research limitations and future opportunities. Ultimately, this research provides project developers and decision-makers with an additional tool, facilitating the greater inclusion of these sustainable solutions in the context of an intensifying climate crisis.