Financing nature as a solution

Investments that focus on restoring nature and reversing biodiversity loss can minimise risks and reduce costs to businesses, society and the economy. They can also provide benefits. These include environmental services, such as improved pollination; a reduction in climate-related risks, such as flooding or urban heatwaves; and the protection of the aesthetic and intrinsic values of nature. To realise these benefits, both governments and private investors must place nature at the heart of financial decision-making.

Investments in nature are challenged by significant barriers, such as lack of sufficient data at business level and lack of standardised biodiversity impact metrics for investors. A better understanding is needed of the private and public benefits of different types of biodiversity (e.g. common farmland birds or rare mountain plants) and the combination of public and private actions that can help protect Europe’s rich nature. This briefing also discusses how better data and tools can play a role in informing public and private stakeholders’ decision-making on biodiversity financing.

© Image c/o Max Pixel 

The funding gap for restoring nature

There is a considerable gap between the supply and demand of appropriate financing for the transition towards sustainability. The most recent global reports about the state of nature-related financing showcase the extraordinary challenges facing natural capital investments, as well as opportunities for them. The United Nations Environment Programme (UNEP) calculates that finance for nature-based solutions currently amounts to USD133 billion per year (UNEP, 2021); public funds make up 86% of this and private finance accounts for only 14%. The private share includes funding for biodiversity offsets, sustainable supply chains and private equity impact investments, and smaller amounts from philanthropic and private foundations.

Investment in nature-based solutions needs to at least triple in real terms by 2030 and increase fourfold by 2050 if the world is to meet its climate change, biodiversity and land degradation targets (UNEP, 2021). This is consistent with another analysis suggesting that current spending on biodiversity conservation is between USD124 billion and USD143 billion per year; in contrast, the estimated amount needed to reverse biodiversity decline by 2030 is between USD722 billion and USD967 billion per year (Deutz et al., 2020). Notably, the total amount of finance currently flowing into restoring nature is considerably smaller than the amount flowing into mitigating the impacts of climate change (UNEP, 2021).

Restoring and sustainably managing ecosystems can offer multiple economic, environmental and social returns connected to climate regulation through carbon sequestration; food supply through pollination service and fish stock management; and more. Furthermore, ecosystem degradation (for instance, in terms of climate change impacts) results in costs that are far higher than the investment needed to preserve them. A recent, high-level review of the economics of biodiversity has shown that global economies have failed to manage their portfolio of assets sustainably (Dasgupta, 2021). There is a growing imbalance between demands and nature’s supply: as human capital per person increased by around 13% globally in the period 1992-2014, the stock of natural capital per person declined by nearly 40% over the same period (Dasgupta, 2021). Therefore, these is a strong need to generate significantly more investment in the sustainable management and restoration of nature.

Building a knowledge base for biodiversity finance

This briefing identifies four key areas for development that could help build a strong knowledge base for biodiversity finance, based on studies and workshops carried out for the EEA:

• creating a strong data foundation by compiling biodiversity and other environmental data, based on clear standards, on the national, ecosystem and business scales;
• building tools for the spatial integration of environmental and financial data, so that private capital can be targeted at the areas or ecosystems that need it the most;
• developing models and standards that describe the impacts of different types of businesses on biodiversity, as these business impacts vary widely (e.g. between mining operations and forestry enterprises);
• exploring mechanisms and instruments to attract and scale up private and public investments in biodiversity.

Building a strong data foundation

Businesses invest a great deal in collecting and analysing data, including on their customers, to improve workflows. However, data can be compiled from a variety of sources, such as public bodies, citizens and earth observation; data can also be voluntarily disclosed by companies themselves. Therefore, it is important that data are collected and processed on the basis of clear, comparable standards. As a baseline, biodiversity data need to cover the state of and trends in habitats and species as well as pressures on biodiversity from economic activities. Being able to track the level of these pressures and how they affect different types of biodiversity is essential for designing and implementing effective actions to reverse biodiversity loss. This is also important in the context of the EU’s sustainable finance taxonomy, which aims to support economic growth while reducing the pressures on the environment. Companies that consider how their activities may contribute to biodiversity loss are likely to manage business risks better and access finance on better terms than companies that cause more pollution. A solid data foundation gives a clear means of measuring and tracking the impact of actions on nature. Therefore, having correct and comprehensive data is the underlying component of enabling private and public finance for nature restoration.

Many current biodiversity monitoring programmes, whether focused on the pressures on or the current status of biodiversity, are designed to deliver information on national trends. This means that detailed biodiversity data for local business operations or specific to, for example, different types of farming are generally not available or can be found for only some locations. The range and quality of available data need to be improved. This can be achieved by investing in on-the-ground monitoring programmes via targeted surveys and citizen science, in combination with satellite data and other innovative technologies. Opportunities to improve the data foundation may also lie in combining data from different sources, including from environmental impact assessment processes or (future) business reporting. For example, the Corporate Sustainability Reporting Directive (CSRD) requires companies to disclose information about the environmental performance of assets and economic activities. However, data from these sources present significant challenges in terms of comparability over space and time, including whether they adhere to standardised methods and are fully documented via metadata protocols. Modern technology makes it possible to create a common data platform that is user-friendly and open source, but its establishment requires significant further investment from public and private actors.

Spatial integration of environmental and financial data

The type and diversity of ecosystems and species vary widely across European landscapes, often changing substantially across very limited space, sometimes even within 100 metres. To effectively target protection measures, data on human activity and nature need to be integrated into one fine-grained geospatial system, for example on biodiversity, land use and soil conditions or water levels. This is relevant for two reasons:

• The type and richness of biodiversity depend strongly on land use type and intensity.
• The successful protection of ecosystems and their services frequently requires action in (sometimes small) individual sites as well as at landscape level (e.g. restoring floodplains).

Innovative mechanisms and instruments

Creating nature-based solutions and protecting and restoring biodiversity require the mobilisation of finance and a broad range of financing instruments. Private capital and bond markets represent massive and underutilised resources in this regard. Mobilising private capital through, for example, ‘blended finance’^[5] is essential to unlocking these market opportunities. Blended finance instruments are specifically designed to enhance the expected return from and/or mitigate the risk of investments, as needed; the goal is to bridge the financing gap for new business models, such as in nature restoration. Blended finance can thus play a key role in accelerating the transition towards nature-based solutions and biodiversity restoration. The ‘Rewilding Europe Capital’ initiative (Box 1) is an example of making nature investment opportunities more attractive to private investors by reducing the loan risk, providing lower interest rates or granting longer time frames for repayment.

Many existing initiatives combine an economic activity with a focus on maintaining environmental resources and biodiversity; mainstream examples are sustainable forestry and fishery labels, and organic farming. Other approaches, such as agro-forestry or specialised conservation grazing projects, are in their initial stages. In all cases, to attract private investment, there is a need to demonstrate not only the positive environmental and social effects of land and ecosystem restoration activities, but also the business case for these. Over the past few years, many initiatives, entrepreneurs and investors have turned concepts into reality and are able to share the lessons learned. Their businesses, investment vehicles and financing instruments differ, and each of these has its own advantages and limitations.

The EU aims to attract private capital and channel investment into nature-based solutions, biodiversity protection and restoration, and to provide a common basis for financial activities under the EU taxonomy. Therefore, it is important to show a successful track record and allow the financial risk-return profile to be assessed. This is currently a challenge, as data are limited compared with more mature markets (e.g. renewable energy or infrastructure).

Next steps

The increased urgency and need to mobilise resources to support nature-based solutions, biodiversity and ecosystem restoration call for bridging the gap between current EEA ‘state of nature’ assessments and the development of biodiversity finance. This briefing has identified four areas for further development to support public and private investment in nature restoration: compiling more detailed biodiversity data, creating a spatial data infrastructure and impact metrics, developing business-biodiversity impact models and gaining greater insight into the optimal combination of public and private instruments. However, to successfully tackle biodiversity loss, a combination of biodiversity-linked private investments and public action is needed, which is beyond the scope of this briefing. Specifically, the full implementation of biodiversity-related legislation, further changes in national and EU sectoral policies, and better coordination of public and private instruments for landscape-scale restoration are needed. 

The EEA will explore opportunities to support the development of the required data foundation and impact models and standards, and the testing of new approaches to biodiversity finance. In doing so, it will seek partnerships with financial institutions, data providers and the financial community to enable strong investment in biodiversity and ecosystem restoration as part of the European Green Deal initiative.