Some investors find making money through biodiversity too complicated compared to more traditional means, a pre-print paper has suggested.

Upscaling private investment in nature faces challenges including risks related to regulation, the complexity of ecology, and social inequalities, a paper on investment in biodiversity in Europe has found.

The pre-print, which drew from 25 interviews, was led by ecological economist Sophus zu Ermgassen from the University of Oxford. The document is a preliminary version that has not yet cleared the peer review process required for publication in a journal.

“They have easier ways of making money,” one interviewee said about the challenge of getting a bigger number of investors involved in nature or biodiversity.

Investors require “very high returns” to justify the risks of biodiversity investments, several interviewees reported.

“It’s not clear where the revenues are going to come from,” another interviewee added.

The findings supported those of a separate paper published in 2023, which said investments had to deliver a mean target internal rate of approximately 15%.

Interviewees saw conservation as requiring large up-front investment for uncertain long-term payoffs, with land managers forgoing short-term revenues.

“A main barrier to investment cited by investors was the cost of monitoring, and the lack of ecologically-realistic metrics to evidence increases in biodiversity,” it said.

Many investors used proxies to signal biodiversity value, such as sustainability certification, but many of these are “highly imperfect”, according to the report.

“The lack of accepted metrics is a barrier, as interviewees noted, because even well-intentioned purchasing of biodiversity or carbon outcomes … may present a reputational risk.”

Over the past couple of years, a number of companies that had purchased carbon credits which later became discredited have been subject to negative media coverage, a risk several potential biodiversity credit buyers have cited as a main reason for taking a ‘wait-and-see’ approach.

Numerous different ways of measuring biodiversity have been announced over the last couple of years.

The EU Biodiversity Strategy for 2030 indicated a projected annual investment requirement of €48.15 billion for the bloc to meet its ambitions, implying an annual shortfall of €18.7 bln over 2021-30, the paper said.

SOCIAL RISKS

Turning to social risks, the pre-print said expanding biodiversity-related investment opportunities has the potential to exacerbate pre-existing inequality, as owners or managers of land are best positioned for them.

“Interviewees recognised these inequities may pose a reputational risk to the credibility of these markets themselves through public opinion, especially in the context of blended finance,” the report said.

“Social engagement at project sites for project developers throughout our interview sample was consistently mentioned as something that was a ‘nice-to-have’, but resource shortages frequently meant these activities were deprioritised beyond just satisfying the basic requirements of legislation or accreditation schemes.”

Public policy has been underappreciated as a critical enabler for commodification mechanisms, regulation, and demand, the pre-print concluded.

Despite the challenges, numerous different types of investments in nature are happening. For example, over the last few days these included a Colombian water credit pilot, the issuing of a $245 million sustainability-linked bond targeting the Amazon, and the raising of a $50 mln fund focused on Egyptian reefs.

By Thomas Cox – t.cox@carbon-pulse.com

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