Biodiversity Finance

Earth’s ability to sustain life is defined by its remarkable biological diversity. With nearly nine million species coexisting alongside a human population exceeding eight billion, biodiversity plays a crucial role in maintaining ecological balance and providing essential services supporting economic and societal well-being. However, human activities have increasingly disrupted these ecosystems, leading to the rapid loss of species abundance and genetic diversity, with far-reaching consequences for global economies and financial stability. This book examines the intersection of biodiversity and finance, analyzing the economic implications of biodiversity loss on ecosystem services, and the role of financial mechanisms in funding conservation and restoration efforts.

Since the 1992 Earth Summit, research on biodiversity and ecosystem functioning (BEF) has expanded significantly, leading to major scientific initiatives and economic assessment of valuing natural capital and funding biodiversity. Concurrently, biodiversity and ecosystem services (BES) research evolved, emphasizing large-scale ecological and economic evaluations. This book reviews key findings from over three decades of research, exploring how biodiversity influences ecosystem processes and contributes to ecosystem services and examining how biodiversity loss affects economic resilience, investment risks, and financial instruments designed to close the biodiversity funding gap to safeguard natural capital. It also highlights emerging trends in biodiversity finance, offering strategies to align financial decision-making with conservation goals and drive environmental management.

This chapter investigates the critical nexus between biodiversity loss and financial stability, highlighting the far-reaching implications of natural ecosystem degradation on the global economy. By analyzing the multifaceted channels through which biodiversity loss influences financial institutions and markets, we uncover risks such as supply chain disruptions, escalating operational costs, reputational damage, and heightened vulnerability to systemic risks. The chapter underscores the pivotal role of ecosystem services in underpinning economic activities and potential consequences of their disruption. Drawing on case studies from diverse regions, we illustrate how financial institutions are increasingly exposed to biodiversity-related risks and the strategies they are adopting to address these challenges. The chapter emphasizes the systemic nature of biodiversity risks and the need for proactive risk management measures to mitigate their potential impact on financial stability. Furthermore, we discuss the integration of biodiversity considerations into financial decision-making processes and explore the role of macroprudential policies in fortifying financial stability against biodiversity-related risks.

This chapter introduces nature-inspired finance, a novel approach that applies principles from nature to financial systems, including adaptability, resilience, and interdependence. Traditional financial models often prioritize short-term gains while externalizing environmental costs, and rely on mathematics and physics, and less so on biology. In contrast, nature-inspired finance aligns investment strategies with ecological sustainability through instruments like biodiversity credits, green bonds, and conservation trust funds. By integrating lessons from biomimicry and other disciplines, finance can evolve into a regenerative and resilient system. This shift requires interdisciplinary collaboration to break the siloed science disciplines, and regulatory support to promote long-term targets for enhanced risk resilience. There is also a need to develop advanced tools for valuing biodiversity, ensuring that financial systems contribute to long-term environmental, societal, and economic resilience.

The value of the multiple benefits that societies obtain from ecosystems depends (among other factors) on the health of that ecosystem which, itself, is dependent at the same time on the biotic and abiotic factors that define its structure. Furthermore, the provision of ecosystem services requires the whole ecosystem, which is not only defined by its components but mainly by the interaction of the multiple webs built within. In these webs, species can potentially influence other species, and these interactions can include both biological processes and physicochemical processes. Each species plays a different role in supporting different ecosystem services, with certain keystone species having a disproportionate impact on the stability of the ecosystem structure. The analytical framework I present in this chapter considers the network dynamics of nature, and therefore the value of species based on maintaining the balance and function of the system in order to keep providing benefits to society. There is currently a gap in the economic and finance literature with respect to the role that species play in supporting ecosystem services. This chapter aims to close this gap by presenting a five-step methodological framework to estimate the economic value of a species’ role in ecosystem service provisioning. This provides a sound justification for the investments needed to protect and restore keystone species populations and for the creation of novel financial solutions.

Nature and biodiversity are under threat. Action is required by firms and regulators to achieve the biodiversity-related goals specified in the Kunming-Montréal Global Biodiversity Framework. One of these action items includes a call for clear and easy-to-use biodiversity metrics and indicators. These metrics and indicators are increasingly being developed, as exemplified by the core global biodiversity indicators by the Taskforce on Nature-Related Financial Disclosures (TNFD). Although a step in the right direction, there are complexities with biodiversity scores, metrics, and indicators that necessitate further improvements in the future. This chapter reflects on why these indicators should not immediately be regarded as the holy grail of biodiversity disclosure. Issues include those relating to the static nature of the indicators compared to the complex and dynamic nature of ecosystems, the quality of “capture-all” biodiversity metrics, and the narrow focus on impact mitigation as opposed to adaptation to a degraded state of nature. Additionally, as biodiversity disclosure is in its infancy, firms are facing uncertainty with respect to voluntary or required improvements regarding their impact on biodiversity, and its effect on the value of the firm. We employ a simple valuation framework firms can adopt, subsequently illustrating its use by considering the TNFD biodiversity indicators in combination with relevant literature to reason about the effects that reducing biodiversity impact has on firm value. Such actions likely lead to reduced firm value in the short-term. Nonetheless, disregarding the importance of nature may impair the viability of many business models in the long-term. Finally, multiple academic works demonstrate that there are also opportunities for firms to embrace the reduction of biodiversity impacts through the creation of novel products, the exploration of new markets, rethinking business models, and proactively applying advanced practices and technologies.

Biodiversity loss represents one of the biggest global risks and challenges of our time due to the high rate of depletion and irreversible loss of flora and fauna, habitats, and vital crops. Biodiversity loss threatens the disruption of the entire ecosystem and the global economy that depends on the integrity and health of our planet’s ecosystem. Although biodiversity loss is a multi-faceted problem with many causes, we can differentiate between direct and indirect drivers, and the consequences of their interactions on development, business, climate change, and the United Nations’ 2030 Agenda for sustainable development. These consequences have severe implications for food and water security, climate change adaptation, disasters reduction, risk management, and human health. One of the key findings from our literature review is that biodiversity continues to decline. This is in part driven by the fact that a variety of indirect drivers influence the direct drivers responsible for biodiversity loss and that the interlinkages between nexus elements (water, food, health, and climate change) have negative impacts on biodiversity. The prioritization of GDP growth disrupts ecosystems and is a main driver of biodiversity loss. However, given the negative impacts of biodiversity loss on businesses, global development, climate change, and the 2030 Agenda, there are many global and national efforts, initiatives and response options including the green growth policy, nature-based solutions, biodiversity disclosures, initiatives and the Kunming-Montreal Global Biodiversity Framework that aim to reverse biodiversity loss and restore biodiversity. A transformative system-wide approach comprising the “whole of society” and “all facets of government” is thus required to tackle the problem of biodiversity loss.

In an era of rapid environmental change, biodiversity loss has emerged as a critical yet often overlooked risk with far-reaching implications for economies and financial systems. While climate and ESG risks have gained significant attention, biodiversity risk, which is a distinct subset of environmental risk, remains underexplored. Biodiversity encompasses the diversity of life across terrestrial, marine, and freshwater ecosystems and the ecological interactions that sustain them. However, drivers such as land-use changes, habitat destruction, climate change, pollution, and the introduction of invasive species increasingly threaten biodiversity. The degradation of ecosystems poses significant financial risks, as businesses and financial institutions depend directly and indirectly on ecosystem services such as pollination, water purification, and carbon sequestration. This chapter examines biodiversity risk within the broader landscape of financial risk management, emphasizing its relevance to the stability of financial markets. Regulatory efforts are advancing, particularly in Europe, where the European Sustainability Reporting Standards (ESRS) require organizations to disclose biodiversity-related impacts, risks, and opportunities as part of the Corporate Sustainability Reporting Directive (CSRD). Beyond regulatory developments, this chapter reviews existing research on biodiversity risk, exploring methodologies for assessing financial exposure to ecosystem degradation. Financial institutions and researchers have developed various metrics to evaluate biodiversity risks across portfolios, such as the Global Biodiversity Score (GBS) and the Pollinator Abundance Index. Finally, we discuss the importance of integrating biodiversity risk into traditional financial risk models. By recognizing biodiversity as a key component of financial decision-making, this chapter aims to contribute to more resilient and sustainable financial practices, ultimately enhancing financial stability and promoting responsible investment strategies that align with long-term environmental sustainability.

The European Union’s Nature Restoration Law (NRL) and Corporate Sustainability Due Diligence Directive (CSDDD) at the time of writing represent significant legislative advancements in addressing biodiversity loss and corporate responsibility. This research explores the synergistic relationship between these two instruments, focusing on how the CSDDD can amplify and disseminate the biodiversity conservation objectives of the NRL among European companies. The NRL, proposed in June 2022 and finally adopted in June 2024, aims to restore degraded ecosystems across the EU, setting legally binding targets for Member States to implement restoration measures. Concurrently, the CSDDD, introduced in February 2022 and adopted in May 2024, mandates large companies to identify, prevent, and mitigate adverse impacts on human rights and the environment throughout their value chains (Directive (EU), 2024/1760). While the NRL primarily addresses governmental actions, the CSDDD extends the sphere of influence to the private sector, creating a powerful mechanism for integrating biodiversity conservation into corporate strategies. This integration is crucial, as business activities significantly impact biodiversity, often beyond national borders. The CSDDD’s due diligence requirements compel companies to assess their operations’ impact on biodiversity, aligning with the NRL’s objectives. This alignment can manifest in various ways. The CSDDD necessitates companies to develop a comprehensive understanding of their biodiversity impacts, potentially leading to increased support for NRL initiatives. Companies must examine their entire value chains, potentially uncovering and addressing biodiversity impacts in regions within and outside of the EU. The CSDDD’s emphasis on stakeholder consultation can facilitate collaboration between businesses, governments, and communities in implementing strategies fostering biodiversity protection. The dual pressure from the NRL and CSDDD may spur companies to develop nature-positive business models and technologies. Furthermore, the CSDDD’s disclosure requirements can provide valuable data for monitoring progress towards the NRL targets. However, challenges remain in harmonizing these legislative instruments. The complexity of biodiversity assessment, potential conflicts between economic interests and conservation goals, and the need for standardized metrics pose significant hurdles. In conclusion, the CSDDD has the potential to significantly enhance the reach and impact of the NRL by embedding biodiversity conservation within corporate decision-making processes. This synergy between environmental legislation and corporate governance represents a promising approach to addressing the global biodiversity crisis.

Standard financial assets have not proven to be effective tools to meet the objective of raising sufficient private capital for biodiversity protection. How to finance a reversal in biodiversity deterioration remains a challenge. In this chapter, we propose a model of Biodiversity-related Sustainability-Linked Bonds (BrSLBs) as an innovative financing instrument for biodiversity conservation and restoration. Following an option pricing approach, we derive a pricing model where the Key Performance Indicator (KPI) is related to the issue of contrasting biodiversity loss and nature deterioration. We propose a comprehensive pricing formula for BrSLBs that is based on multivariate digital options and accounts both for the KPI provision and the issuers’ credit risk. We then investigate a series of relevant questions regarding these instruments, for example, the existence of a “bio-sustainium,” the interaction between sustainability performance and issuer’s credit risk, the optimal design of these bonds, and potential greenwashing. The chapter contributes to the understanding and expansion of sustainable finance and offers solutions for funding biodiversity preservation.

Biodiversity provides critical ecosystem services such as pollination, carbon storage and water purification, contributing an estimated USD $125–140 trillion to the global economy annually. Despite this, biodiversity loss and climate change continue to intensify. Nature-based solutions, such as wildlife corridors, cover cropping, natural water retention measures, and buffer strips, may help address these challenges. Yet they receive little financing. This chapter explores the potential of biodiversity offsets and credits to fund nature-based solutions. It focuses on their integration with financial instruments such as sustainability-linked bonds, debt-for-nature swaps, and payment for ecosystem services. It advocates for a “net gain” approach to biodiversity, requiring offset ratios to far exceed the commonly used 1:1 ratio to reverse biodiversity loss and restore ecosystem health. Key recommendations include moving beyond single-species metrics, engaging Indigenous and local communities and enforcing strict monitoring and governance. While not a panacea, biodiversity offsets and credits can play a role in advancing the financing of nature-based solutions.

Biodiversity loss is one of the most pressing global environmental problems. It profoundly impacts the stability of ecosystems and the associated services essential for humankind’s survival. In order to protect and restore biodiversity, innovative financing mechanisms are needed that not only pursue ecological goals but also create economic incentives. Payments for environmental services (PES) are a promising instrument to reward biodiversity conservation financially. This chapter examines payments for biodiversity services in different countries and analyzes their role in financing biodiversity projects. It examines the mechanisms and the challenges that influence the effectiveness of these systems. Particular attention is paid to analyzing how PES significantly improves access to resources for local communities while promoting ecological conservation, offering hope for a more sustainable future. A comparative approach identifies specific success factors and obstacles to implementing PES in countries with high biodiversity and developed economies. This allows us to position PES as an ambivalent instrument for safeguarding biodiversity and promoting sustainable development.

In this chapter, I present a detailed cross-country comparison of biodiversity financing solutions and biodiversity research funding. Utilizing data from the BiodivERsA and BIOFIN databases, which aggregate data from several countries, our analysis highlights trends in funding allocation, project focus areas, and the participation of various stakeholders. The data reveals diversity in funding mechanisms employed by different countries and agencies. These mechanisms include competitive funding programs, collaborative research initiatives, and direct funding from national and regional governments. I explore how these varied approaches contribute to the robustness and adaptability of biodiversity finance, offering lessons on the benefits of diverse funding portfolios for advancing conservation and biodiversity outcomes.

The Kunming-Montréal Global Biodiversity Framework, adopted at COP15, establishes a clear mandate to mobilize funding from diverse sources to address the escalating biodiversity crisis. Despite growing awareness and commitment to biodiversity conservation, a substantial financing gap persists, hindering efforts to protect and restore ecosystems effectively. This chapter provides an in-depth examination of financial mechanisms designed to bridge this gap, presenting both established and emerging strategies. Drawing on recent studies quantifying the biodiversity funding gap, the chapter synthesizes global and national insights to illuminate the scale of the challenge. It underscores the urgent need for innovative financial mechanisms to mitigate biodiversity loss and ensure the long-term sustainability of natural ecosystems. Applying an updated framework, the chapter categorizes and analyzes biodiversity finance mechanisms in the context of their evolution and growing innovation. It examines traditional approaches such as domestic government funding, international grants and transfers, and conservation trust funds, as well as novel mechanisms like payments for ecosystem services, biodiversity offsets, and ecological fiscal transfers. The chapter also emphasizes the interplay between biodiversity and climate, highlighting opportunities for synergy across environmental themes.

This chapter reveals a transformative shift in biodiversity finance, moving from reliance on external funding and public budgets to market-based and self-generated mechanisms. Simultaneously, it emphasizes the critical role of public policy and government in enabling and regulating these approaches, even within market-driven models. By offering a comprehensive overview of biodiversity finance mechanisms, this chapter lays the groundwork for subsequent discussions on specific financial instruments, including biodiversity bonds, credits, insurance, and certification schemes. It serves as an essential resource for policymakers, investors, conservation practitioners, and researchers seeking to advance biodiversity conservation through innovative financial mechanisms.

This chapter delves into the dynamic field of biodiversity finance, outlining key trends and future projections. It highlights the proliferation of specialized investment funds dedicated to biodiversity conservation, the integration of biodiversity considerations into environmental, social, and governance (ESG) criteria, and the development of innovative financial mechanisms such as blended finance, green bonds, and nature bonds. The chapter explores how corporations are increasingly embedding biodiversity considerations into their strategic frameworks and examines the expanding roles of both the public and private sectors in driving investments. Looking forward, it projects a heightened emphasis on nature-based solutions, the evolution of regulatory landscapes, technological advancements in biodiversity monitoring, and enhanced methodologies for impact measurement. These insights underscore the critical necessity for effective biodiversity finance mechanisms to address the global biodiversity crisis and promote sustainable conservation practices. Additionally, the chapter underscores the growing practice of integrating biodiversity into financial decision-making and the development of biodiversity-sensitive financial products. Through relevant case studies, the chapter illustrates the implications for investors, corporations, and policymakers, advocating for the alignment of financial strategies with biodiversity objectives to ensure long-term environmental resilience. This nuanced exploration of current trends and future projections in biodiversity finance provides a comprehensive framework for understanding the multifaceted interactions between finance and biodiversity conservation, emphasizing the urgent need for robust financial solutions to safeguard our planet’s biodiversity.