How to unlock private finance for nature: reframing risk-return dynamics

Nature encompasses biodiversity and the Earth systems that sustain it, underpinning the functioning of our societies, economies and financial systems. Yet, global ecosystems are rapidly degrading and threatening the flow of services that are essential to human well-being, like healthy crops and clean water. Therefore, it is critical to mobilise financial resources to support projects that explicitly target the conservation, sustainable management, or restoration of ecosystems and the services on which human life depends. Such projects are distinguished from conventional investments by their focus on outcomes like biodiversity protection, ecosystem service regulation, or restoration activities, and often rely on blended models combining public, philanthropic, and private capital. 

Expanding public investment remains essential, but fiscal and political constraints limit governments’ ability to fully finance nature targets. Private finance is therefore essential for funding nature projects at the required scale, but right now these are projects are seen as too risky.  I like to think of it as a cheesecake – if the base (funding or expected revenue stream) is not solid, the filling (investments) cannot be layered on top.

Alongside my co-authors I conducted a systematic review of literature across five ecosystems and three intervention types,  identified four persistent barriers:

1. Limited financial returns

Nature projects often generate revenues that are insufficient to meet risk-adjusted expectations. This is particularly evident in projects with long payback periods or where the benefits are diffuse and non-monetisable. Moreover, competing land uses such as agriculture or timber extraction frequently provide higher short-term financial returns, making conservation or restoration less attractive to private financiers.

2. High risk and uncertainty

Nature-related finance face multiple layers of uncertainty: ecological (e.g., fire, disease, extreme weather), market (e.g., volatile carbon prices, immature biodiversity credit markets), and governance (e.g., weak regulation, unclear land tenure). Projects that sell credits are also bound by permanence requirements that may extend for decades or even centuries, adding to investor hesitation. However, this risk is often overstated due to limited data and valuation frameworks, creating a cycle where under-investment leads to further ecological degradation, which then raises both real and perceived risks.

3. High transaction costs

Fragmented landholdings, especially in smallholder and community contexts, lead to prohibitively high costs for project development, monitoring, and certification. Complex procedures for verifying ecosystem benefits and distributing payments also add layers of cost, sometimes enabling elite capture and corruption. These costs disproportionately burden early-stage or community-led projects, making them less competitive compared to larger, standardised ventures.

4. Undervaluation of nature

Conventional financial accounting frameworks fail to capture the full benefits of nature such as systemic resilience or cultural value. As a result, many conservation or restoration projects appear unprofitable because their long-term and non-market benefits are excluded from cost–benefit assessments. Moreover, discount rates applied to nature investments often ignore positive externalities such as reduced flood risks or sustained fisheries, leading to systematic undervaluation and under-investment in nature.

Blended finance that involves the strategic use of concessional public or philanthropic capital to de-risk investments and crowd in private finance has emerged as a promising approach. However, evidence suggests its effectiveness remains context-specific and fragmented, with mechanisms often concentrated in projects linked to commodified outputs such as carbon or sustainable commodities. While blended structures can recalibrate risk–return profiles and, therefore, demonstrate bankability, they also risk shifting liabilities to the public sector and subsidising private actors without ensuring any developmental additionality. 

Other solutions include:

1. Project aggregation: Aggregating fragmented landholdings or small-scale projects can increase ticket sizes, pool risks, and make investments more attractive to private financiers.
2. Conservative crediting: Using conservative ex-ante credit value forecasts or ex-post verified credits enhances credibility, reduces perceived risk, and builds investor confidence.
3. Bundling of ecosystem services: Stacking or bundling multiple ecosystem services from a single intervention potentially creates diversified revenue streams, improving the return profile of projects.
4. Shorter-maturity bonds: Issuing shorter-term bonds, such as Colombia’s Biodiversity Bond, helps align investment horizons with financiers’ preferences while supporting nature outcomes.

The future of nature finance will depend on moving beyond fragmented, project-level solutions toward structural interventions that address systemic undervaluation, high transaction costs, and overstated risk perceptions. While blended finance can play a catalytic role in demonstrating bankability and crowding in private capital, its application remains concentrated in niche markets and is often reliant on public subsidies. Reframing risk–return dynamics to internalise the long-term resilience benefits of nature is therefore critical if private finance is to scale credibly, equitably, and beyond commodified segments. It will require interventions from policymakers and financial institutions, but if we can reframe risk and reward, nature finance can move from niche projects to mainstream capital markets.