Scaling Up Private Action for Nature

Annex A. General investment barriers for biodiversity

Table A.1 summarises general investment barriers, risks and uncertainties that deter private investment for biodiversity.

Table A A.1. General investment barriers to scaling up action on biodiversity

Challenges	Description
Financial and investment challenges	Biodiversity-related lending or investments often face challenges around expected returns, which tend to vary greatly depending on the sectors, market maturity, value chains, and size of companies or projects (SAFIN/Convergence, 2021[1]). Projects are often small scale and non-commercial and lack a viable pipeline of investment opportunities (OECD, 2023[2]). Financial institutions often shy away from investing in small-scale enterprises and producers because these enterprises and producers frequently face: lack of knowledge and capacity; high real and perceived risks; high transaction costs (OECD, 2021[3]); erratic and infrequent income (Anderson and Ahmed, 2016[4]); geographically remote, informal or highly variable business models (Havemann, Negra and Werneck, 2020[5]); limited expertise, local capacities and track record of business cases (which contribute to high risk profiles); and fragmented markets characterised by many small and micro enterprises operating in emerging niches with unclear market prospects (European Commission, 2020[6]). Existing solutions such as blended finance can also have drawbacks, among them a perceived tedious and lengthy process that is unacceptable to some clients and what is often lack of consideration for the different risk appetites of participating institutions (UNEP, 2023[7]). The ability to match demand and offer in order to create sustainable value in the economy is another issue of concern.
Geographical risk	Most biodiversity and natural resource challenges are location specific, and solutions need to be tailored to individual conditions (World Bank Group, 2020[8]). This creates challenges in identifying a problem and then replicating a solution. In effect, the extent of a company’s impacts and dependencies on nature will vary according to where it is located or where its key supply chains and raw materials are located (Principles for Responsible Investment, 2020[9]). Growth trends and expected returns on investments will also vary within different economic activities across sectors in a specific context, further highlighting the need for context-specific preliminary investments – e.g. studies, research, market analysis and/or demonstrations – to better understand the sustainability potential of investment projects (European Commission, 2020[6]).
Project scale and revenue challenges	The small scale and localised nature of biodiversity projects often mean that biodiversity projects usually do not generate sufficient revenue streams, and this is a key hurdle to attracting private finance (OECD, 2018[10]; World Bank Group, 2020[8]). When revenue does exist, the financial returns are often below market return thresholds. As biodiversity is a public good, its true value is rarely captured in market pricing, complicating private sector engagement. Financial solutions are often context dependent and difficult to replicate or scale at the global level (Chenet, 2019[11]).
Short-term financial focus and/or mismatch of time horizons	A fundamental mismatch exists between the short-term focus of financial institutions and the long-term nature of biodiversity outcomes (Chenet, 2019[11]). Most financing structures are short term – for instance, credit institutions typically have loan horizons of three to five years, portfolio managers’ incentives are yearly, and financial analysis is limited to a three- to five-year horizon. Even long-term investors such as pension funds depend on external asset managers operating with short mandates (three to five years). This short-term focus creates a disconnect with the long-term, high-impact nature of biodiversity and ecosystem restoration projects, which require extended periods for meaningful results. This dynamic reflects what Carney has called the “tragedy of the horizon” (Bank of England, 2015[12]), where financial and policy outlooks are much shorter than the time frames of environmental degradation and climate change, resulting in under-investment in natural, human or technological capital; these long-term risks are systematically underpriced and undermanaged.
Access to capital issues	Access to capital is necessary at the individual and community level, where it is often lacking, particularly for Including MSMEs and other local businesses (e.g. smallholder farmers). The inclusion of such actors into the formal sector can be challenging because they often do not know how to access credit and given their limited financial records (e.g. inability to provide financial statements and lack of transparency in investment opportunities), they are unlikely to be granted it. Nevertheless, formalising these enterprises is essential for them to gain access to the capital and other financial services that are key to successful scaling (Global Fund for Coral Reefs, 2021[13]). Attracting financing for nature can also be challenging for nature and land rights holders due to factors that hinder their ability to secure funding, “including power imbalances, financial practices that fail to adequately value natural resources, a limited understating of investment structuring and contractual agreements, restricted access to expert nature finance legal counsel, and the imposition of excessive risk and liability on those receiving the funds” (Forever Wild, 2025[14]).
Data and measurement gaps	Lack of reliable standardised data and indicators is a core barrier for the economic valuation of ecosystem services (European Union, 2023[15]) and for conducting biodiversity financial risk assessments (OECD, 2023[16]). It can also create higher entry costs – such as the cost of having to develop in-house solutions – to fund biodiversity initiatives (Principles for Responsible Investment, 2020[9]). These challenges are more acute in regions such as Africa, where baseline data and collection systems are weak, and this may in turn undermine the development of effective legislation, policy and regulation (Nature Finance, 2024[17]). Companies also struggle to assess the long-term impacts of conservation efforts due to gaps in national-level biodiversity data (IPBES, 2019[18]). Data on the complex relationship between companies and biodiversity through operations and supply chains are also limited. Lack of a clear taxonomy of biodiversity investments and definitions, risk frameworks, and reporting makes it hard to assess and price the risks associated with biodiversity, particularly in the face of uncertainty and unprecedented environmental changes (World Bank Group, 2020[8]; Chenet, 2019[11]). These uncertainties increase transaction costs and deter private sector participation (European Union, 2023[15]).
Technical and capacity constraints	Business development in biodiversity-related sectors may face constraints due to limited technical knowledge of production practices, certification processes, market access and the marginally commercial viability of many value chains (OECD, 2023[2]). Sustainability literacy and expertise along the investment and lending chain are often inadequate (High-Level Expert Group on Sustainable Finance, 2017[19]). Implementing voluntary commitments like responsible sourcing and certification is often slow due to weak consumer demand, price sensitivity and the significant upfront costs involved (Mo, 2017[20]).
Weak regulatory frameworks and governance	Scaling and replication of a model in different environments may rely on certain underlying conditions associated with regulatory and policy clarity and local governance. The general business environment must be conducive to successful business transactions such as investment and access to capital – basic conditions that are not always met in developing countries and remote areas (Global Fund for Coral Reefs, 2021[13]). Additionally, regulatory bottlenecks such as the lack of predictability and transparency for obtaining licenses, permits and concessions, which are often issued at the local level, can significantly hinder private investment as investors require stable and enforceable frameworks to assess project viability and manage risk (European Commission, 2020[6]). Ineffective regulation, weak monitoring and lack of political will, legislation, and consideration of Indigenous peoples and local communities’ cultural values and knowledge can also present barriers (IPBES, 2019[18]) . Moreover, in some governments, the environment ministry may be a newer and weaker actor than economic and central ministries, which can create friction in cross-sectoral decision making. Indeed, different ministries can see mainstreaming biodiversity across sectors as onerous and undesirable (IPBES, 2019[18]). Where regulations do exist, they are often not enforced or have weak penalties for non-compliance (Principles for Responsible Investment, 2020[9]). Uptake and implementation can similarly be affected by regulatory frameworks that inhibit ecosystem services (e.g. unclear ownership or tenure rights of forests, land and waters); by poorly targeted incentives that do not reward pioneers (European Union, 2023[15]); and by the opinions of citizens and companies that consider ecosystem service provision to be primarily a governmental duty rather than a private sector responsibility.
Perverse economic incentives	Perverse economic incentives such as environmentally harmful subsidies can incentivise unsustainable production and consumption practices, undermining efforts to support biodiversity. These may adversely affect biodiversity and ecosystems and lead to overfishing and illegal unreported and unregulated fishing (Martini and Innes, 2018[21]); deforestation; urban sprawl; fresh water depletion (IPBES, 2019[18]); and the overuse of pesticides and fertilisers (Matthews and Karousakis, 2022[22]).
Social and cultural norms	Differences in cultural values and degrees of social acceptance (e.g. traditional values, local norms, different epistemic and/or ontological views of forests and nature) also pose significant barriers (Vidal et al., 2022[23]; Schulte et al., 2022[24]). Overcoming legacy mindsets and power struggles that can lock in behaviours, relationships and dependencies among stakeholders is necessary to shift consuming behaviour and transform production practices (Holtedahl, Köberle and Koci, 2023[25]). For instance, farmers’ decisions are often shaped by farm size, cultural preferences and know how (Gil, Siebold and Berger, 2015[26]), and their willingness to try new approaches depends on perceived returns and financial resilience. Historical practices, including long-standing tradition, beliefs and livelihood practices, may pose strong barriers to adoption of alternative sustainability measures in land-based activities such as shifting cultivation, swidden or slash-and-burn practices for clearing lands, or smoking of wood pest management) (Acero, 2020[27]). Social dynamics, including peer influence and competition among producers, may further affect the adoption of sustainable practices (Ginbo, Di Corato and Hoffmann, 2021[28]).

Note: While the barriers listed in this table are relevant globally, they are often more acute in developing countries, and the nature and severity of these barriers can vary significantly across least developed countries (LDCs), SIDS and emerging economies.

Source: Authors’ elaboration based on results of consultations and desk research.

References

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