What is conservation finance?
Human economic activity occurs almost everywhere on the planet, radically reshaping our environment and driving the widespread loss and degradation of ecosystems. Conservation finance tries to achieve sustainability within the current global economic system, by putting capitalism’s profit motive to work to protect and restore nature.
Conservation finance is an evolving field, with many different approaches united by a shared goal of reallocating financial capital in ways that benefit nature. In the past, values-driven investment, such as philanthropic giving, was the major route for financing nature-positive activities. Today, a variety of strategies are used, including building markets for nature (for example, trading carbon or biodiversity credits), creating novel financial instruments such as green bonds or debt-for-nature swaps, mainstreaming nature in monetary policy and taxation, and informing investors about the impacts of their portfolios on the natural world (as in the growing use of Environmental, Social and Governance [ESG] metrics to guide investment decisions).
What are the origins of conservation finance?
Conservation finance is part of a larger movement that believes that recognising the economic value of nature and incorporating it into economic decision-making will result in better environmental outcomes. Historically, many natural values were treated as ‘externalities’: not priced, and therefore not integrated into decision-making. One way to solve this problem is to identify elements of the natural world that are useful to humans (such as its ability to provide clean water, a stable climate, or pleasant views) and reframe them in economic terms as ‘goods’ and ‘services’. Nature thus becomes ‘natural capital’, a new asset class that businesses (and governments) can invest in to reap rewards.
Critics of the natural capital approach view these efforts as inherently flawed or limited in perspective, but its proponents are undoubtedly succeeding in raising awareness of nature-related issues in business and policy circles by highlighting the crucial underpinning role that nature plays for all types of economic activity. Investments in natural capital are large and appear to be growing. An increasing number of countries are integrating nature’s economic values into economic statistics and decision-making. Private sector initiatives such as the Taskforce on Nature-related Financial Disclosures, World Business Council for Sustainable Development and the Glasgow Financial Alliance for Net Zero are also gaining significant traction.
What public and private sector leadership is needed?
There are many ways to reallocate capital towards outcomes that benefit nature, and both political leadership and private sector action have a role to play.
Political leadership has been essential to success so far: governments have the power to create or reshape private sector markets, for example by putting prices on pollution, introducing a requirement for investment in biodiversity credits, or mandating that companies publicly disclose their environmental impacts. By setting the ‘rules of the game’ correctly, governments can unlock the power of markets to allocate capital in the most efficient way.
A contrasting vision of the role of government emphasises the importance of direct and indirect expenditures by the public sector. Governments provide an estimated 80–85% of global finance for biodiversity conservation, as well as environmentally-harmful subsidies worth as much as US$1.8 trillion per year. Forms of public sector expenditure including blended finance, grants, and tax incentives are among the most impactful levers currently available to reallocate financial capital to protect and restore nature.
However, public finance is not enough. Meeting current climate, biodiversity and land degradation targets is expected to require an additional $4.1 trillion by 2050 and current investments are not being made at a rate to meet this target. Governments lack the revenue to close this critical financing gap, placing the onus on the private sector to drive action for the conservation finance agenda.
How can the private sector finance nature?
From the point of view of a profit-led decision-maker (e.g. a private investor, firm or financial institution), there are two overarching incentives to participate in emerging conservation finance markets. First, new markets mean new opportunities to make profit. Second, the physical impacts of climate change and biodiversity loss, and a greater focus on sustainability in consumer preferences and regulatory environments, present new and important risks to existing business models.
Our improved understanding of the connections between human wellbeing and healthy ecosystems, and a shared interest in reallocating the costs and benefits of these interactions and impacts, creates new market opportunities. In nature-dependent sectors like farming, fishing or forestry (which constitute around one-tenth of global GDP) the economic value of healthy ecosystems has always been recognised and managed. Today, a deeper understanding of the complex pathways by which natural value flows through economies is generating new opportunities for investment.
Conservation finance markets seek to invest in:
- Productive ecosystem services, like crop pollination, that enable or increase traditional economic activity.
- Defensive expenditure, like protecting freshwater sources, to avoid future costs.
- New markets for ecosystem services, like the voluntary carbon market.
- Sustainability-linked debt issuances, such as green bonds.
- Derivative products, like credit default swaps.
At present, investment in these products probably reflects preferences for sustainability as much as opportunities for profit. By creating new financial instruments, conservation finance seeks to unlock more profit opportunities and dramatically scale up capital flows.
What challenges does conservation finance face?
Rapid growth in activities that finance nature conservation has been accompanied by accusations of greenwashing in green bond markets and voluntary carbon markets. Justice and equity are also critical concerns, and while awareness around is growing more needs to be done. Furthermore, the environmental impact of many conservation finance instruments remains is not yet clear.
Technical challenges to the success of conservation finance centre on the ability to accurately measure the interactions between ecosystems and economies, and attribute environmental impacts to specific economic agents. Controversy around greenwashing, for example, is largely due to disagreements about whether claimed impacts actually occur (e.g. do offset markets actually reduce deforestation?). Some of these challenges can be resolved, while in other cases financial instruments must be designed to live with uncertainty.
More fundamental challenges relate to the underlying theory of change: throughout history, destroying or degrading nature has been economically profitable. While financial levers can – and must – be used to slow or reverse these losses, other actions are also necessary, such as policy intervention by governments and lifestyle choices by individuals. Ultimately, achieving societal goals for the conservation and restoration of nature may require deeper changes, such as a shift towards more sustainable consumption preferences.