(Photo by iStock/EyeEm Mobile GmbH)
It’s easy to demonstrate the need to fund nature conservation, beyond simply funding the fight against climate change. Wildlife populations have declined 73 percent since 1970, one million species are threatened with extinction, and scientists have determined that the world has crossed seven of nine planetary boundaries. Five of the 10 greatest long-term global risks are environmental, according to the World Economic Forum, with biodiversity loss and ecological collapse ranking second among all risks to the global economy and population. Moreover, funding biodiversity is an investment, not a cost: With over half of global GDP dependent on nature, a transition to a nature-positive economy could actually generate up to $10.1 trillion in annual business value, creating 395 million jobs globally by 2030.
Fighting climate change and conserving nature are not in opposition, of course. Nature will be critical to solving the climate crisis: neither biodiversity loss nor climate change will be successfully resolved unless both are tackled together. Yet while nature-based solutions can contribute about one-third of the climate change mitigation needed by 2030, nature receives only 2 percent of total climate funding. Why this disparity?
The problem is that we’ve expected private finance to shoulder the burden, and it hasn’t. When I left the world of private equity to apply my finance skills to nature conservation, I had hundreds of conversations with people who used buzzwords and phrases like “innovative finance,” “market-based solutions,” and “impact investing” to describe their goal of uniting profit with conservation. “We just need to build a pipeline of investable projects” was a common refrain, and they made it sound easy to save nature and make money at the same time. When I looked, however, I found that pipeline virtually empty, and it has remained so over the past ten years. Everyone agrees that private finance will be essential to close the nearly $1 trillion annual biodiversity funding gap, but 40 years of generating “innovative finance” and “market-based solutions” have left governments still providing over 80 percent of nature funding.
Climate finance is often taken as a model for financing nature conservation, but the economics are fundamentally different. In 2023, private sources provided over $1.2 trillion of climate finance out of a total of $1.9 trillion, representing 66 percent of total climate finance. The share of private finance for climate was over four times the 15 percent share of private finance for nature. The difference is that the private sector can generate attractive financial returns by investing in things like renewable energy, electric vehicles, and efficiency upgrades; these opportunities have led to massive increases in private investments addressing climate change. Similar opportunities to generate revenues and returns simply don’t exist in nature conservation.
It’s important to remember that attractive climate investment opportunities didn’t happen on their own or through market forces. Governments implemented meaningful policies that make investing in climate solutions profitable and, in some cases, also put in place disincentives that make contributing to climate change costly. For example, in the solar industry, the United States subsidized the research and development that created the first solar panels, China’s industrial policies drove down the costs of manufacturing those panels, and Germany, China, the US, Japan, and other countries all subsidized the adoption of solar that made it attractive for consumers to install. Even now that renewables are the cheapest form of energy, they continue to need government policy support to meet the world’s climate goals.
Nature conservation is going to need comparable levels of policy and regulatory support as climate, if it is going to attract private capital at the scale necessary to close the biodiversity funding gap.
Why Hasn’t Private Finance for Nature Scaled?
While there are compelling reasons for the private sector to collectively invest in nature, there is not a compelling business case for any individual business to invest in what will always be, ultimately, a public good. And however much value nature provides (and will be missed if it’s gone), companies and investors have no incentive to internalize their externalities, which will be borne by society but not accounted for on individual financial statements.
We can’t blame companies, managers, or investors for this lack of investment; they are incentivized to maximize profits for their shareholders (“You must not expect unnecessary good behavior from capitalists,” as Jeremy Grantham put it). To do otherwise risks your bonus or your job as a manager and, if you are publicly traded, invites an attack on your company (see, for example, Danone) from activist hedge funds (which are also just doing their job in our current system). Being a private company not subject to public market pressures doesn’t change the incentive structure: there are few copycats of Yvon Chouinard’s strategy at Patagonia.
We have seen a range of voluntary commitments on climate from large tech companies and groups of banks, but companies inevitably prioritize shareholder returns over voluntary sustainability efforts. We have therefore seen prominent climate goals in the tech sector missed, deforestation pledges fail, and coalitions like the Net-Zero Banking Alliance cease operations.
This is a classic example of a market failure that must be addressed through government action. Governments need to recognize biodiversity as the public good that it is, like education and science, public health, infrastructure, and security, the sort of public good that must be funded by governments or incorporated into private investment decision-making through public policy, regulations, and incentives. The private sector is not going to step up and invest in nature voluntarily if it doesn’t increase returns to shareholders in the short term; that’s not how the game is played. However, as Tariq Fancy, former Chief Investment Officer of Sustainable Investing at BlackRock put it, governments can “fix the rules of the game.”
How to Change the Rules
Governments can change the rules of the game for the private sector through incentives and regulations, and can also raise funds from the private sector through taxes, fees, and levies that can then be used to directly fund investments in nature, each of which is discussed below. “To realize the potential of private sector investment in nature protection and conservation,” as Hank Paulson put it, “governments must put in place policy measures—such as tax breaks, de-risking guarantees, and regulatory requirements—that induce the private sector to invest.”
1. Incentives
Governments can incentivize the protection and restoration of nature through a variety of mechanisms, including government grants, loans, guarantees and tax incentives that encourage activities that generate positive impacts, or reduce negative impacts, on biodiversity.
For example, Costa Rica’s payments for ecosystem services (PES) program pays landowners for the environmental services (e.g., carbon sequestration, biodiversity and soil conservation, and water purification) provided by the conservation and reforestation of their land. Funded by a tax on fossil fuels, the program has helped Costa Rica increase its forest cover from 21 percent in the late 1980s to over 50 percent today. The United States provides tax incentives to encourage private land conservation, which have resulted in the conservation of over 61 million acres of private lands, an area larger than all of the U.S. National Parks combined. A similar program in South Africa has added over one million acres to its protected area network.
Government-backed entities like the U.S. Development Finance Corporation, Inter-American Development Bank, and World Bank have provided guarantees that attract private capital in debt-for-nature swaps that generate new long-term funding for nature, totaling $1.7 billion to date. And the Tropical Forest Forever Facility (TFFF), launched at COP30 in Brazil, is the latest effort to provide incentives for private investment in conservation. The TFFF intends to raise $25 billion of government funding and use that to leverage $100 billion of private funding. Returns from investments of these funds will be used to pay tropical forest for the conservation and restoration of their forests. The government contributions are junior to the private contributions to the fund, de-risking the investment for the private investors.
There is also massive potential for governments to shift incentives by redirecting government subsidies away from activities that harm nature toward activities that conserve and restore it. Governments currently provide $2.6 trillion of environmentally harmful subsidies to fossil fuel, agriculture, forestry, construction, fisheries and other industries, about three times the amount needed to close the biodiversity funding gap, and agreed to reform $500 billion of those subsidies by 2030 in the Kunming-Montreal Global Biodiversity Framework.
2. Regulations
Governments can require increased private investment in nature by implementing regulations that require changes in private sector activities that impact nature and investments to implement those changes.
Examples include the US Clean Air Act and Clean Water Act, which set limits on pollution of air and water, generated trillions of dollars of private investment and resulted in significant positive impacts on biodiversity and human health. The UK is also instituting a new regulation that requires developers to deliver a biodiversity net gain of 10 percent. It is intended to make sure development will result in more or better-quality natural habitat than there was before development. The EU Regulation on Deforestation-free Products requires businesses to prove that their products do not originate from recently deforested land or have contributed to forest degradation.
3. Taxes, Fees, and Levies
In addition to incentives and regulations, governments can generate funds from the private sector through taxes, fees, and levies that they can then use to invest directly in biodiversity.
Colombia, for example, has implemented a carbon tax that generates $100 million annually and uses 80 percent of the proceeds to fund investments in nature. The US Land and Water Conservation Fund uses earnings from offshore oil and gas leases to fund state and federal land and water conservation and has provided over $22 billion to date. Botswana’s protected area fees generate $8 million per year. Belize charges a $20 conservation fee to all tourists that directly funds its Protected Area Conservation Trust. The state of Hawaii is assessing a “Green Fee” on tourists that is projected to generate $100 million per year to invest in its natural resources. And my hometown of Boulder, Colorado, was the first city in the nation to implement a tax to conserve land, resulting in the protection of over 45,000 acres (over 70 percent of the city) and helping to make it one of the best cities to live in the country.
There are also initiatives underway to develop and implement global levies on things like fossil fuels, aviation, shipping and financial transactions to generate more funds. And governments need to fund nature-related research and development (as they have in renewable energy) in areas such as sustainable agriculture that will help develop new technologies that reduce costs and lead to positive outcomes for biodiversity.
What We Need Now
Nature is in crisis, and we need fewer “finance experts” and complex voluntary efforts and more focus on generating political will. We need to embrace the irony that to get the private sector investing in nature, we have to first focus on the public sector. Leaders in all sectors who have committed to the Kunming-Montreal Global Biodiversity Framework and the Paris Climate Agreement must generate private finance by changing the rules of the game.
Read more stories by Mark Opel.