The global financial sector is accelerating the development of new markets and mechanisms to address the economic risks of biodiversity loss, channeling capital into projects that protect and restore natural ecosystems. This shift comes as awareness grows that the degradation of nature is not only an environmental crisis but also a material threat to financial stability, with more than half of the world’s total GDP moderately or highly dependent on nature and its services.
A suite of innovative financial instruments, from biodiversity credits to debt-for-nature swaps, is being deployed to close an estimated $700 billion annual funding gap for reversing nature loss. These tools aim to create new asset classes based on the value of intact ecosystems, pushing corporations and financial institutions to account for their impacts and dependencies on the natural world. This movement is supported by emerging global standards for disclosure, designed to make nature-related risks transparent to investors, regulators, and the public for the first time.
The Dual Risk of Inaction
Financial institutions and corporations are confronting two primary categories of nature-related risk. The first is physical risk, which arises from the degradation of ecosystem services that underpin economic activity. For example, sectors such as agriculture, fisheries, and tourism suffer direct losses when ecosystems like rainforests, coral reefs, or wetlands are damaged, affecting commodity prices, supply chain stability, and asset values. These disruptions can lead to lower returns on investments and increased credit risk for lenders.
The second category is transition risk, which stems from the societal and policy shifts aimed at halting nature loss. As governments implement new regulations, such as stricter land-use laws or penalties for environmental damage, companies may face increased operational costs, stranded assets, or shifts in consumer preferences that negatively impact their profitability. The Kunming-Montreal Global Biodiversity Framework, adopted in 2022, signaled a global commitment to halt and reverse biodiversity loss by 2030, putting pressure on businesses to align their practices with nature-positive goals. Failure to adapt to this transition exposes firms and their financiers to significant legal and market risks.
A New Framework for Disclosure
To help organizations navigate these challenges, the Taskforce on Nature-related Financial Disclosures (TNFD) launched a global framework in 2023. Modeled on the successful Taskforce on Climate-related Financial Disclosures (TCFD), the TNFD provides a voluntary risk management and disclosure system for organizations to report on their dependencies, impacts, risks, and opportunities related to nature. Its goal is to support a shift in global financial flows away from nature-negative outcomes and toward nature-positive ones by embedding nature into corporate decision-making.
The Four Pillars of TNFD
The TNFD framework is structured around four key pillars, mirroring its climate counterpart to encourage rapid adoption:
- Governance: How the organization’s board and management oversee and manage nature-related issues.
- Strategy: The actual and potential impacts of nature-related risks and opportunities on the organization’s businesses, strategy, and financial planning.
- Risk and Impact Management: The processes used by the organization to identify, assess, and manage its nature-related dependencies, impacts, risks, and opportunities.
- Metrics and Targets: The data and targets used to assess and manage relevant nature-related issues.
The TNFD also provides an internal assessment process called LEAP (Locate, Evaluate, Assess, Prepare) to guide companies in analyzing their relationship with nature, from identifying their operational footprint to evaluating their risks and preparing to report on them.
Innovations in Conservation Finance
With frameworks for risk assessment in place, the financial sector is now creating and scaling the instruments needed to mobilize capital. These tools work by creating tangible, tradable value for actions that protect or enhance biodiversity, thereby attracting private investment that has historically been absent in conservation efforts.
Biodiversity Credits
Biodiversity credits are a market-based instrument designed to finance activities that deliver measurable, positive outcomes for nature. Unlike offsets, which are used to compensate for damage done elsewhere, biodiversity credits are intended to fund “nature-positive” actions beyond a company’s own value chain. Each credit represents a verified biodiversity gain, such as restoring a specific area of habitat or protecting a threatened species. For instance, a project in Colombia issues credits where one credit corresponds to the conservation of 10 square meters of high-biodiversity cloud forest for 30 years. Demand for these instruments is projected to grow substantially, with some estimates predicting a market reaching $2 billion by 2030.
Debt-for-Nature Swaps
Debt-for-nature swaps are another powerful tool, particularly for developing nations. In these arrangements, a portion of a country’s foreign debt is forgiven by a creditor in exchange for the debtor government’s commitment to invest in domestic conservation projects. The world’s first such swap occurred in 1987, when a portion of Bolivia’s debt was cancelled in return for the government setting aside 3.7 million acres of land for conservation. A more recent and larger example is Ecuador’s 2023 deal to protect the Galapagos Islands, which converted $1.6 billion of sovereign debt into a much smaller loan, with the savings dedicated to funding marine conservation for the next two decades.
Mobilizing Private Capital
The push to finance nature is engaging a wide array of private sector actors. Insurance and reinsurance companies are increasingly recognizing their role in de-risking nature-positive investments and are developing new products that account for nature-related liabilities. Venture capital and private equity firms are also scaling their engagement, investing in startups focused on regenerative agriculture, ecosystem monitoring technologies, and other nature-based solutions. Even family offices and high-net-worth individuals are becoming more involved, seeing a responsibility to deploy capital as government ambition on nature sometimes wanes. These varied sources of capital are crucial for funding the diverse, often localized projects required to restore ecosystem health on a global scale.
The Path Forward
Despite the rapid innovation, significant challenges remain. Accurately measuring and verifying biodiversity gains is complex, and establishing high-integrity markets that avoid greenwashing is paramount to building investor confidence. The World Economic Forum and other organizations have emphasized the need for strong guardrails and principles to ensure that financial instruments like biodiversity credits deliver real, lasting benefits for both nature and local communities. A fragmented reporting landscape is another hurdle, though efforts to align the TNFD framework with emerging global sustainability standards aim to create more consistency for companies and investors. Ultimately, the success of these financial innovations will depend on their ability to make the value of nature visible in the global economic system, driving a fundamental realignment of capital with the preservation of the planet’s biological wealth.