Biodiversity finance: How can biodiversity be financed by private capital investments? 

The biodiversity crisis is one of the grand challenges our world is facing. The current state of affairs is alarming. In their Living Planet Report 2022, the World Wildlife Fund (WWF) reports an average decline of 69% in species populations between 1970 and 2018, referring to this development as a “code red alert” for humanity. In addition, the loss of biodiversity represents an existential threat to the world economy. Recent estimates of the World Economic Forum reveal that more than half of the world’s GDP is dependent on nature and its services.

The protection and conservation of biodiversity requires considerable amounts of funding. Historically, most of this funding has been provided by the public sector and philanthropic organizations. However, this is unlikely to be enough. In a recent report, The Nature Conservancy estimates that about USD 722-967 billion per year of additional financing is needed to close the financing gap and effectively address the biodiversity crisis. How can we close this financing gap? One avenue could be the reliance on private capital. In this regard, a new development in sustainable finance is the emergence of “biodiversity finance,” in which private investors invest in biodiversity projects that aim to provide both financial returns and biodiversity impact. While this phenomenon is gaining momentum in practice, it is not well understood.

In a new study entitled “Biodiversity Finance”, Thomas Giroux, Geoffrey M. Heal, and I take a first step at exploring how private capital can help mitigate the biodiversity crisis. Specifically, we provide a conceptual framework that lays out how biodiversity investments can appeal to private investors, and provide first evidence on biodiversity finance using the proprietary database of a leading biodiversity finance institution.

Risk and returns

Traditional investors care primarily about risk and returns. How can biodiversity investments generate returns? This is a difficult question, as biodiversity is a public good—that is, one cannot exclude individuals from “consuming” biodiversity even if they do not pay for it. Accordingly, the challenge is to find a way to monetize the benefits that arise from this public good. This can be done by bundling the public good (biodiversity) with a private good whose value depends on biodiversity. For example, the preservation of pollinators (such as bees, beetles, and butterflies) can enhance the farmland’s productivity. Hence, investments that bundle farmland investments with pollinators’ preservation can achieve the dual role of persevering biodiversity while providing a financial return to investors.

The second dimension is risk. While the bundling may help generate financial returns, these returns may not be sufficient to compensate investors for bearing the risks of biodiversity investments. One potential remedy is to de-risk biodiversity investments through the use of blended finance. That is, private capital is supplemented (and hence “blended”) with funding from the public sector or philanthropic organizations. The blending reduces the risk borne by private investors, thereby improving the risk-return tradeoff from the private investors’ perspective. In this case, blended capital serves as a catalyst to attract private capital.

Private investments in biodiversity

To examine the practice of biodiversity finance, we obtain access to the proprietary database of a leading biodiversity finance institution. Since biodiversity investments are a new phenomenon, the database only includes 33 deals that were closed between 2020 and 2022 and are still ongoing (the average maturity of these deals is 8 years). We find that 19 deals are financed purely by private capital, while the remaining 14 deals are blended finance deals. On average, the pure private capital deals have higher expected returns. Their scale is smaller, however, and so is their expected biodiversity impact. For larger-scale projects with a larger biodiversity impact, blended financing is the more prevalent form of financing. While these deals have lower expected returns, their risk is also lower due to the de-risking from the blending.

Overall, these findings point toward a tradeoff between financial returns and biodiversity returns, with implications for the type of financing. Projects with higher expected returns can be viably financed by pure private, but tend to have lower biodiversity returns. Projects with higher biodiversity returns tend to be less profitable, but can nevertheless appeal to private investors through blending.

Finally, we also obtained data about 32 deals that were under consideration, but ultimately did not make it to the portfolio stage. When comparing these discarded deals with the 33 deals that made it to the portfolio stage, we find that the discarded deals tend to have lower expected returns and lower biodiversity impact. This suggests that deals need to be sufficiently profitable and impactful to attract private capital. Accordingly, private capital may not be a feasible option for a large set of biodiversity projects.

In sum, the results from this study indicate that, while private investments in biodiversity are a useful addition to the toolbox, they are unlikely to provide a silver bullet against the biodiversity crisis. Private investments can help close the financing gap and contribute to the conservation and restoration of biodiversity, but are unlikely to substitute for the implementation of effective public policies.

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By Caroline Flammer, Columbia University and ECGI Research Member.

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