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Writer's pictureSustainable Investment Club SMU
12 min read

The Critical Role of Nature Finance


Introduction

Businesses are deeply reliant on nature, with half of the world’s GDP - $44 trillion being either moderately or highly dependent on nature and its services (WEF, 2020a) like pollination, water purification, and climate regulation. As nature’s ability to provide these services diminishes due to the loss of biodiversity and ecosystem degradation, the dependent economies suffer as well. Despite the clear economic and ecological risks, the response to this crisis has been alarmingly slow, often overshadowed by other pressing issues like climate change. The urgency to preserve and restore our natural assets has not been matched by adequate financing or concerted action, leading to a continued acceleration of species extinction globally.

 

The importance of nature in the economy

Nature is declining at an unprecedented rate, with nearly 1 million species at risk of extinction because of humanity. The World Economic Forum (WEF) ranked biodiversity loss as the third most severe threat humanity will face in the next 10 years (WEF, 2022). Earth system scientists have also cautioned that the Amazon rainforest, the world’s coral reefs, and boreal forest biomes are rapidly nearing irreversible tipping points, which will have profound impacts on the economies and societies.


The WEF identified 15 (non-climate) biodiversity threats as priorities for transition, due to its impact in endangering around 80% of the total threatened and near-threatened species on the IUCN Red List. These 15 threats relate to three main socio-economic systems which represent over a third of the global economy and provide up to two thirds of all jobs (WEF, 2022b) The three socio-economic systems are: food, land and ocean use; infrastructure and build environment; and the extractive and energy system.


Among the three systems, the food, land, and ocean use system carry the highest impact, affecting around 72% of the species on the IUCN Red List. Additionally, this system is estimated to generate unobservable environmental, health, and poverty costs of $12 trillion, which far exceeds its own global GDP output of $10 trillion in 2018 (FOLU, 2019). Presently, this gap has widened further due to the continued conversion of natural habitats, as well as concurrent crop failures in the world’s main food-producing regions due to climate change.


For ocean use, commercial fishing fleets have increased the total area fished from 60% to 90% in the world’s oceans (Tickler et al., 2018), while catching only one-third of the historical amount per distance traveled. Since over 5 years ago, it was reported that over 90% of the world’s fish stocks are fully exploited, overexploited or depleted. Large, harmful fishing subsidies estimated at $20 billion a year play a big role in promoting fishing to environmentally unsustainable levels (UNCTAD, 2018). This is concerning as over 3 billion people rely on wild-caught and farmed seafood as a source of protein (The Nature Conservancy, 2021). Based on a study The Sunken Billion Revisited, reducing the instances of overfishing to allow fish stocks to recover from overexploitation could generate $83 billion of annual net economic benefits (The World Bank, 2017).


The infrastructure and built environment system accounts for 29% of IUCN’s threatened species. Accelerated expansion of cities has significantly impacted surrounding ecosystems and cleared away much biodiversity (World Bank, 2015). According to the World Bank, more than 80% of the world’s wastewater is released untreated, contaminating coastal ecosystems and agricultural lands. Additionally, 80-90% of plastic waste is inadequately managed, resulting in global externalities amounting to $139 billion, with about 10% directly impacting marine biodiversity (Baca, n.d.). Consequently, decisions about sustainable infrastructure development are vital to mitigating the effects on nature and biodiversity.


The decline of biodiversity and ecosystem services is a critical issue that also affects economic development. It is particularly detrimental for low-income countries, as they cannot afford the potential consequences of nature's services collapsing. Johnson et al. (2021) demonstrates that even a conservative estimate predicts a major decline in specific services, such as wild pollination, food provision from marine fisheries, and timber from native forests. This decline could lead to a significant decrease in global GDP, amounting to $2.7 trillion by 2030. The impacts will be most severe in low-income and lower-middle-income countries, where the decline in GDP may exceed 10 percent. Indeed, low and lower-middle income countries are at the highest risk of suffering significant losses if ecosystem services fail. This would pose a threat to their ability to overcome poverty. In particular, Johnson et al. (2021) show that Sub-Saharan Africa and South Asia would be severely affected by a collapse in ecosystem services, leading to a substantial decline in their real GDP. By 2030, Sub-Saharan Africa is expected to experience an annual decrease of 9.7 percent, equivalent to a loss of $358 billion, while South Asia would see a decrease of 6.5 percent, amounting to a loss of $320 billion.


The energy and extractive system accounts for 18% of IUCN’s threatened species. Based on the International Renewable Energy Agency (IRENA), the system produces $9 trillion of annual negative externalities arising from air pollution and CO2 damage (IRENA, 2018). While mining utilizes less than 1% of global land area, its damaging and toxic extraction techniques have continually caused the irreversible pollution of waterways and mercury poisoning in the region. The World Bank estimates that at least 70 million people on the African continent make a living through mining (Lewis, 2019). The recent developments in deep sea mining have also raised fresh concerns in disrupting the ocean floor, which functions as the world’s largest carbon reservoir and home to an estimated 10 million different species (IUCN NL, 2024)


The nature financing gap is coupled with ongoing harmful economic activities

Estimates by Deutz et al. (2020) suggest that between $150 billion to $440 billion per year is required to halt biodiversity loss, whereas current funding stands at only $52 billion annually (Deutz et al., 2020). This substantial gap necessitates innovative finance mechanisms, policy shifts, and greater engagement with the private sector to mobilize additional resources. The Kunming-Montreal Global Biodiversity Framework aims to address this gap, requiring a sevenfold increase in current investments (Seidl et al., 2024). Various innovative financing mechanisms are being explored, including asset management, biodiversity credits, and debt-for-nature swaps (Seidl et al., 2024).


A significant increase in financing from public and private sectors is needed to reverse nature’s decline. According to UN Environment Programme, current finance flows to nature-based solutions (NbS) stands around US$200 billion (Figure 1), which is about a third of the funds needed per year to meet climate, biodiversity, and land degradation goals by 2023 (UNEP, 2023). Governments lead the change by providing most of the funding for NbS at 82%.


Concurrently, efforts to conserve nature are being compromised by large amounts of financial flows to harmful economic activities. Each year, approximately US$1.7 trillion from public sources (Figure 2) and US$5 trillion from private sources (Figure 3) have direct negative impact on nature. These figures do not include indirect impacts on nature. Public subsidies for nature-negative activities span across 4 sectors in agriculture, fossil fuels, fisheries, and forestry. These subsidies entail financial incentives that are harmful to biodiversity. Private finance into industries that channel most of the harmful nature impacts include construction, electric utilities, oil and gas, food, and tobacco. A significant portion of the nature financing gap could be filled by repurposing such harmful subsidies, by improving existing policies that shift financial flows towards outcomes that benefit nature.  


Figure 1: Public and private finance flows to NbS in 2022, $ billion (2023 US$) (UNEP, 2023)


Figure 2: Environmentally harmful subsidies from public sector, $ trillion (2023 US$) (UNEP, 2023)


Figure 3: Nature-negative private finance by sector, $ billion (2023 US$) (UNEP, 2023)


Functional Markets

According to the Taskforce on Nature Markets (2023), nature markets typically take four forms:

  • Intrinsic markets are the largest of the four, enabling the trade of agricultural products, minerals, seafood and even other products obtained from oil and gas

  • Asset markets trade nature assets like land and water rights

  • Credit markets trade carbon and biodiversity credits to conserve and invest in nature

  • Derivative markets trade financial products such as commodity derivatives, nature-related insurance that reflect normative efforts to conserve, invest in nature, and mitigate and manage nature-related risks.


While nature markets are starting to gain awareness and traction in recent times, these markets still face significant challenges related to pricing and governance.


Clear and effective governance remains one of the biggest roadblocks to catalysing growth in nature markets. The lack of uniformity as highlighted through varying standards and regulations across different regions and sectors creates inconsistency which can lead to mispricing of ecosystem services and create barriers for market participants (Eis & Kennedy, 2022). Like carbon markets in its infancy stage, many nature markets are still immature and face scaling challenges such as information asymmetries and monopolies. These issues can hinder the establishment of effective governance structures that ensure fair practices and equitable distribution of benefits.


Many nature markets fail to adequately price the true value of ecosystem services, resulting in inefficient resource use and enabling harmful practices. Nature markets are valued at approximately USD$9.8 trillion, a fraction of the $44 trillion figure alluded earlier, as the explicit pricing of ecosystem services is often insufficient to reflect their actual worth and importance.


Additionally, despite the increasing awareness and progress in financial mechanisms, several factors prevent the full realization of biodiversity finance:

  1. Inadequate valuation of biodiversity: Many ecosystem services are not accurately reflected in market prices, leading to insufficient investment in biodiversity conservation.

  2. Data limitations: Consistent and reliable data on biodiversity and ecosystem services are lacking, making it difficult to measure the impacts of conservation finance.

  3. Political and regulatory barriers: Regulatory frameworks for biodiversity finance are weak in many countries, and there may be a lack of political will to prioritize biodiversity conservation.

  4. Risk perceptions: Biodiversity projects are often seen as high-risk investments, discouraging private sector participation.


A recent article by Garel et al (2024) introduces the corporate biodiversity footprint (CBF), a new measure that quantifies a firm's negative impact on biodiversity. It examines whether this measure is reflected in the pricing of stocks in an international sample. Overall, the CBF does not explain the variation in returns between 2019 and 2022. However, since October 2021, there has been an emergence of a biodiversity footprint premium, where firms with larger footprints experience higher returns. This coincided with the Kunming Declaration, which marked the first phase of the UN Biodiversity Conference (COP15). In line with this discovery, stocks with large footprints experienced a decline in value in the days following the Kunming Declaration. Furthermore, the launch of the Taskforce on Nature-related Financial Disclosures (TNFD) in June 2021 had a similar effect. These findings suggest that investors now demand a risk premium due to the anticipation of future regulation or litigation aimed at preserving biodiversity, along with the associated uncertainties. Flammer et al. (2023) shed light on a new practice in sustainable finance: the financing of biodiversity conservation and restoration through private capital. Their analysis suggests that biodiversity projects seeking private capital must meet certain thresholds in terms of both financial returns and biodiversity impact. Therefore, private capital alone cannot replace the need for effective public policies in addressing the biodiversity crisis.


The Way Forward

The decline of nature and biodiversity poses an urgent and complex threat to the global economy, with its impacts disproportionately affecting low-income countries and vulnerable communities. Despite the clear economic risks, the response has been insufficient, and the harmful activities driving ecosystem degradation continue at a rapid pace. To reverse these trends, transformative changes across key socioeconomic systems, particularly in food, land, and ocean use, infrastructure, and energy extraction, are essential.


Nature investments are not being made at the necessary level. The biggest deterrent for private investors is the lack of reliable and substantial sources of revenue. We can classify the obstacles to nature investing into two categories: policy barriers and implementation barriers. Policy barriers include the absence of incentives for investing in nature, as well as subsidies and other regulations that hinder such investments. Conflicting policies, like the ones affecting mangrove restoration in Indonesia, have been proven to be detrimental.


It is crucial to adjust investment expectations to better align with local realities in order to adapt. The characteristics and circumstances of high-impact nature-based solutions (NbS) projects often differ from what investors expect. Although carbon offsetting projects may be an exception, they still encounter their own challenges. Projects that significantly impact globally important ecosystems typically operate in remote areas, where running a business is a daily struggle and attracting the necessary talent is difficult. Therefore, investors who are genuinely committed to making a difference in biodiversity conservation must be more open to lower returns, smaller investments, and longer investment durations.


Grant funding and technical assistance are essential components of the overall funding structure. NbS projects require grant funding and technical assistance to be integrated into their financing structure. This will enable them to eventually operate solely with debt and equity financing.


The Asian Development Bank (ADB) unveiled the Nature Solutions Finance Hub for Asia and the Pacific during COP28 (ADB, 2023). Its main objective is to attract a minimum of $2 billion in investments for programs that integrate nature-based solutions, with a specific focus on capital markets and private capital sources. The hub will utilize various financing mechanisms, including guarantees, impact-linked payments, and blended finance options, to mitigate risks associated with nature-based solution projects. The goal is to secure approximately $1 billion in de-risking funds from global development partners, and discussions are currently being held with several organizations. This is a huge step for the APAC region, where two-thirds of GDP is dependent on nature.


On disclosure, the Taskforce on Nature-related Financial Disclosures (TNFD) has developed a set of disclosure recommendations and guidance that encourage and enable business and finance to assess, report and act on their nature-related dependencies, impacts, risks, and opportunities. The aim is to support a shift in global financial flows away from nature-negative outcomes and toward nature-positive outcomes (TNFD, n.d.). TNFD plans to publish its final guidance on nature transition plans in Q2 2025, taking reference from existing work by the Glasgow Financial Alliance for Net Zero (GFANZ), WWF and the Transition Plan Taskforce (TPT).[MOU1] [u2] 


To conclude, both public and private sectors must significantly scale up investments in nature-based solutions (NbS), enhance governance, and implement policies that redirect financial flows toward nature-positive outcomes to mitigate looming economic and environmental risks. Without decisive action and adequate investment, ecosystems may reach irreversible tipping points, accelerating species extinction and amplifying climate-related impacts worldwide.


 

References


 

Glossary

  • Biodiversity Credits: An economic instrument that allow private companies to finance activities, such as forest conservation or restoration, that deliver net positive biodiversity gains.

  • Debt-for-nature Swaps: A financial instrument that allows countries to free up fiscal resources to build resilience against the climate crisis and take action to protect nature while still being able to focus on other development priorities without triggering a fiscal crisis. The country can reduce its external debt while benefiting nature and environmental groups involved in the deal, and banks profit from selling on the debt.

  • IUCN: The International Union for Conservation of Nature's Red List of Threatened Species, also known as the IUCN Red List or Red Data Book, is the world's most comprehensive information source on the global conservation status of animal, fungi and plant species.

  • NbS: Nature-based Solutions

  • Taskforce on Nature-related Financial Disclosures: A market-led initiative that has developed a set of disclosure recommendations and guidance that encourage and enable business and finance to assess, report and act on their nature-related dependencies, impacts, risks and opportunities.


 

Acknowledgement

This article was prepared by Singapore Management University’s Sustainable Investment Club and Singapore Green Finance Centre. The principal authors are: Adele Lim, Clive Tan, and Lam Ting Kang (Research Directors) of Singapore Management University’s Sustainable Investment Club, and Maria Teresa Punzi, Senior Research Fellow, Singapore Green Finance Centre.

 

The article on SGFC’s platform can be found here.

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