Private sector interest in biodiversity is growing rapidly after the success at COP15 and the emergence of a voluntary nature credit market, but a study released this week warned that private finance won’t be a silver bullet for the biodiversity crisis as private capital injected into the field so far has come with certain limitations and preferences.
Biodiversity projects funded entirely by private investors tend to require higher expected rate of returns while in general being less ambitious in terms of biodiversity outcomes, while projects backed by blended finance can make do with lower profits, but are often larger in scale and have more impact on ecosystems.
That’s according to a study released this week by the European Corporate Governance Institute (ECGI), penned by researchers from Columbia University and France’s Centre for Research in Economics and Statistics.
The study is important because of the almost complete lack of academic work that has been done around biodiversity finance, leaving many potential investors uncertain about the risks and opportunities involved.
“While private capital can hep close the financing gap and contribute to the conservation and restoration of biodiversity, it is unlikely to provide a panacea against the biodiversity crisis,” the study concluded.
The researchers were given access to detailed information on a portfolio of 33 biodiversity projects built by an undisclosed investor over 2020-22, as well as on 32 projects the investor ended up not backing.
While that is a limited amount of data, the study said it allowed the researchers to develop insights into the nature of biodiversity finance that future studies can build on.
The anonymous biodiversity investment manager was involved in projects funded in two different ways – either purely by private players, or blended, where public money or contributions from philanthropists were added to the mix, helping reduce the risks for the private investors.
“Using deal-level data from the [investor], we show that projects with higher expected returns tend to be financed by pure private capital. Their scale is smaller, however, and so is their biodiversity impact,” the study said.
“For larger-scale projects with a more ambitious biodiversity impact, blended finance is the more prevalent form of financing.”
The researchers found that projects that secured blended finance had a lower return for investors, but they also offered a lower risk level which made it possible for the private investors to accept lower profits.
At the same time, rejected projects tended to have lower financial as well as biodiversity returns, suggesting any biodiversity efforts looking for funding must either satisfy the financial returns desired by private investors or the nature impact ambitions of blended finance.
“As such, these findings suggest that private capital (either as standalone or in blended form) is unlikely to provide a silver bullet against the biodiversity crisis, but can nevertheless be a useful addition to the toolbox,” the ECGI study said.
The conclusions, while maybe not hugely surprising in and of themselves, underpinned some concerns that a poorly designed voluntary biodiversity credit market could contribute to a lack of balance in which project types can achieve funding.
“Some [ecosystems] regenerate quite rapidly, for example tropical humid forests, while others take decades like the boreal forests. Recovery patterns will depend on disturbances and factors such as climate change,” Colombian developer Terrasos and South African ValueNature wrote in a working paper last month.
“This mandates thinking about biodiversity credits in a way that is coherent with natural dynamics and does not create a bias towards faster recovering systems.”
By Stian Reklev – stian@carbon-pulse.com
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