What is nature finance?

Nature finance flows funds to nature through a range of financial instruments.

The problem: nature is worth more dead than alive in the current financial system.

Investors are not able to allocate more capital to nature projects and activities at the speed or scale required. The message from investors is clear: investable nature finance opportunities are needed, and increasing investment relies upon whether attractive opportunities grow at pace.

The solution: crowding-in more capital from a wider range of investors is critical.

Traditional government and philanthropic funding for conservation, restoration, and stewardship activities will not be sufficient to stop and reverse biodiversity loss or meet climate targets by 2030. In Canada alone we require $15-20 billion USD in additional funding annually to address the challenges at hand, about five times what is currently being spent.

Growing the pool of public and philanthropic funding is an important step in closing this gap, but to meet our financing needs requires broadening the spectrum of funders, which includes an important role for the private sector. Yet attracting private finance to nature is challenging, given that ecosystems do not lend themselves to traditional investment vehicles.

The value of conserving, restoring, and sustainably managing ecosystems have upfront costs whose benefits, such as increased carbon sequestration and flood mitigation, or improved air quality, are diffuse despite the costs that rise in their absence.

Nature finance helps address this challenge by offering the instruments that align and incentivize partners to invest in activities that generate financial returns alongside environmental, cultural and/or social benefits.

What Nature Finance Instruments Exist?

Nature finance instruments create an incentive to invest in nature by defining and aligning benefits and outcomes to the participants.

These instruments are context dependent: for example, some apply better to agricultural landscapes, whereas others are more useful for large-scale conservation efforts. Specific needs must be examined to evaluate the applicability of various financial instruments.

The financial instruments below are plotted along a spectrum of generalized expected rates of return. Hover over each instrument for more information.

Lower percentages title

-100%
-90%

Conservation Trust Funds

Conservation trust funds are large scale funding vehicles to provide sustained funding and support for conservation goals in a specific landscape.

Project Finance for Permanence

A specific type of public-private partnership focused on long-term financial support for conservation initiatives where government or other financial inputs are mobilized as the initial funding is consumed.

Revolving Funds

A large pool of assets that allocate upfront capital to projects meeting specific criteria (such as coastal restoration) as a loan, to be paid back via cost savings over time.

Species and Habitat Mitigation Banking

Legal instruments of compensatory mitigation that involves creation and sale of credits for a specific species or ecosystem of concern.

Best Management Practices Insurance

Best Management Practice Insurance programs compensate farmers for reduced yields or profits resulting from the adoption of specific on-farm practices.

Middle percentages title

-10%
7%

Biodiversity Credits & Offsets

Biodiversity credits and offsets are generated through conservation and restoration activities that result in enhanced biodiversity outcomes relative to a baseline. The difference is that credits are for enhanced protection, whereas offsets are purchased to compensate for damage elsewhere.

Voluntary and Regulated Carbon Credits and Offsets

Credits are generated from additional (i.e. in addition to business as usual) carbon sequestration, including reforestation, avoided deforestation, soil management practices, and others. Credits are sold to voluntary buyers, rather than buyers seeking to meet legal requirements. Parties whose emissions are restricted by policy can purchase carbon offsets to compensate for excess emissions.

Higher percentages title

Conservation Impact Bonds

Impact bonds are privately financed performance bonds in which a payout only occurs if the conservation project achieves its predefined goals.

Forest Impact Investment Funds

Funds are in place to direct investment and management of a suite of sustainable forestry operations, generating returns from multiple revenue streams.

Resilience Bonds

Resilience bonds are a specific bond type where the payout is by beneficiaries of restoration and conservation activities that enhance resilience.

Payment for Ecosystem Services

Payment for ecosystem service programs provide a financial incentive from a public or private entity to reward farmers for positive environmental practices.

-100%
-90% to -10%
0%
1% to 7%
8%+

Conservation Trust Funds

Conservation trust funds are large scale funding vehicles to provide sustained funding and support for conservation goals in a specific landscape.

Project Finance for Permanence

Biodiversity Credits & Offsets

Conservation Impact Bonds

Impact bonds are privately financed performance bonds in which a payout only occurs if the conservation project achieves its predefined goals.

Forest Impact Investment Funds

Funds are in place to direct investment and management of a suite of sustainable forestry operations, generating returns from multiple revenue streams.

Revolving Funds

A large pool of assets that allocate upfront capital to projects meeting specific criteria (such as coastal restoration) as a loan, to be paid back via cost savings over time.

Species and Habitat Mitigation Banking

Legal instruments of compensatory mitigation that involves creation and sale of credits for a specific species or ecosystem of concern.

Voluntary and Regulated Carbon Credits and Offsets

Resilience Bonds

Resilience bonds are a specific bond type where the payout is by beneficiaries of restoration and conservation activities that enhance resilience.

Best Management Practices Insurance

Best Management Practice Insurance programs compensate farmers for reduced yields or profits resulting from the adoption of specific on-farm practices.

Payment for Ecosystem Services

Payment for ecosystem service programs provide a financial incentive from a public or private entity to reward farmers for positive environmental practices.

Where Do Financial Returns on Investments in Nature Come From?

Direct revenue generation from a produced commodity (e.g., forestry, agricultural product), in which the investor has equity stake, or loan to, a business that produces the commodity
Reduced insurance premium payments due to investments in natural infrastructure that reduce the risk or impact of a weather-related event or natural disaster
Revenue generated from an investment in a thematic fund
Direct payments to landholders for improved management practices, such as payment for ecosystem services programs
Avoided capital or maintenance costs, such as the avoided water treatment costs associated with watershed restoration, or the reduced costs to cities or landowners associated with reducing the impact of extreme weather events
Interest from loans and revolving funds where an individual project, suite of projects, or organizations engage in an activity to produce ecological outcomes, and through the cost savings or revenue generated are able to pay back the loan
Direct revenue generation from offsets or credits

So what’s holding nature finance back in Canada?

Nature finance faces several challenges that have hindered its widespread adoption and effectiveness in Canada:

Limited awareness and understanding of when and how nature finance can support the business case for investing in nature.
Regulatory and policy barriers
Lack of market signals that incentivize nature investment

Read more in our explainer, Why Isn’t Canada a Global Leader in Nature Investment?

Nature finance is not a silver bullet

Nature finance instruments are not always the best way to fund activities. Funding species-at-risk, for example, is necessary regardless of a financial incentive.

Nature finance is not intended to redirect existing donor streams. The intention is to attract new investors for revenue-generating projects and free up donor funds for nature projects that do not generate revenue.

Commodification of nature is not the goal. The goal is to flow investment in a way that reflects a better understanding of the value and benefits of nature.