New research from PwC UK uncovers an opportunity for investors to scale their impact

Closing the critical nature investment gap

Closing the critical investment gap for nature
  • May 09, 2023

By Ian Milborrow, James King and Theo Bromfield

Despite the alarming risks that society faces from nature loss, the world continues to spend too little on conserving and restoring natural ecosystems. To date, public financing has shouldered the lion’s share of the responsibility for natural capital finance. However, public financing alone will fall far short of the required levels of investment needed to achieve a nature-positive future. Turning things around won’t be easy, but nature-based solutions appear to be within reach—and could offer a significant opportunity for investors.

Recent research by PwC UK and PwC’s Centre for Nature Positive Business, based on analysis of some 80 nature finance vehicles and interviews with 40 stakeholders, produced several recommendations for how to expand the volume of private capital going into projects that protect and restore nature. And those recommendations are significant: new project structures, public–private financing mechanisms, better communication between project developers and investors, and higher-quality data could all create opportunities to build value by protecting the world’s precious natural assets.

The current state of nature finance

Existing levels of spending on nature conservation and restoration fall well short of what’s needed—at a time when the risks posed by nature loss continue to mount. In its recent State of Finance for Nature 2022 report, the United Nations Environment Programme estimated that the world spends US$154 billion per year on ‘nature-based solutions’ (actions to protect, conserve and restore natural ecosystems). That’s less than half the predicted funding needed in 2025 and one-third of the 2030 requirement. Looking to governments alone to fill the nature finance gap is neither practical nor sufficient. Our analysis shows that some 83% of spending on nature already comes from public funds, a source best used on projects that aren’t likely to generate commercial returns for investors. Private-sector investment in nature-based solutions amounts to just US$26 billion per year, a fraction of the estimated US$87 trillion of global assets under management.

The good news is that financing nature can present significant and profitable opportunities for private-sector investors. For example, private investors could back ventures that serve the growing consumer demand for nature-positive products and services: a 2022 UN Climate Change High-Level Champions report observed that ‘developing and tapping solutions for a net-zero, nature-positive, resilient food system…could generate up to US$4.5 trillion of new business opportunities by 2030.’ Nature-related projects and business models can also use carbon credits to generate ancillary income.

Overcoming barriers to private nature investment

These potential opportunities notwithstanding, private investment in nature remains persistently low. To understand why, we profiled nearly 80 nature finance vehicles (including regional incubators, grants, loan facilities, blended finance, venture capital and impact investment funds), interviewed more than 40 stakeholders and extensively reviewed existing literature. The findings point towards several ways of catalysing more private investment in nature.

Aggregating projects to create larger investment opportunities and reduce transaction costs

More than half of the nature investments we reviewed were valued at less than US$10 million. Just 3% of the financing vehicles we profiled disclosed investments of more than US$50 million. Opportunities of that size are too small for many institutional investors: several of the stakeholders we interviewed said their minimum investment per project is between US$50 million and US$100 million. Likewise, a 2019 survey from the Nature Conservancy of 62 natural capital asset owners and managers found that access to sufficiently large ticket sizes was the most cited barrier to scaling finance.

Investors may also be put off by the high transaction costs often associated with nature-focused projects, which are exacerbated by the small ticket sizes. Unlike conventional large-scale investments, the lack of consistency across the preparation, execution and documentation of nature-based solutions projects, in particular, leads to increased transaction costs, lowering potential returns. Several investors told us that they hesitate to invest in small projects because of their high transaction costs.

One way to create larger investment opportunities is to aggregate several small projects (for example, those in the same sector or region) into a single proposition. Aggregating projects could also help to diversify the risk profile of investment opportunities. This approach would require further development of methods for aggregating projects and, likely, a measure of public funding to enable initial demonstration efforts.

Using blended finance to improve risk–return profiles

In our interviews, investors cited finding opportunities with sufficiently high returns as a major barrier to financing nature projects. This may reflect a tendency of economic systems to undervalue products and services provided by nature. But nature-related investments also present novel risks for financiers. Several investors conveyed their hesitations about investing in nature because of perceptions of gender equality and social inclusion–related (GESI) reputational risks. For instance, large-scale projects that restore or expand protected land can, in some cases, cause significant tension with local communities.

Although public finance alone is unlikely to fill the nature funding gap, it may still have a place in derisking nature-related investments. Blended capital, a type of project-financing model that uses public funds to absorb some investment risk and thereby attract more private-sector investment, has been used extensively on climate and economic development projects. Our analysis suggests a compelling opportunity for development finance institutions (DFIs) and other sources of public capital to provide the funding needed to structure blended-finance projects for nature, especially in projects that also support DFIs’ social and climate-change objectives.

Upskilling project developers and demonstrating opportunity to investors

Many of the stakeholders we interviewed were candid in saying that a significant barrier to nature finance is a lack of knowledge among investors about business models that can generate a profitable return. Project developers told us of their own difficulties in explaining their business models to investors. Both perspectives highlight the need for upskilling and assistance.

Stakeholders proposed that providing investors with training on how to select suitable investment projects and manage the novel risks associated with nature finance opportunities would help to increase investor confidence. Similarly, technical assistance for project developers could help them design business models that are more attractive to investors. By offering this type of support to businesses, the Climate Finance Accelerator (funded by the UK Government and delivered in-country by an alliance of local programme delivery partners led by PwC) has provided climate project developers with access to more than US$167 million in additional funding across nine countries in two and a half years. Investors said they are particularly interested in seeing project developers identify and stack multiple revenue streams (for example, conservation projects that generate revenues from ecotourism as well as sales of carbon credits) to boost potential returns and mitigate risk.

Improving the availability and quality of data

At present, a lack of localised data on ecosystems makes it difficult for investors to value project opportunities (to estimate the potential value of land restoration or the likely gains in crop yields resulting from regenerative agriculture programmes, for instance). And because nature-related metrics and reporting are not yet standardised, developers have trouble measuring and verifying the impact of their projects in consistent, comparable ways, which further detracts from investor confidence.

Expanding the provision of high quality, affordable, trustworthy data thus has considerable potential to facilitate private investment in nature. One way to support data collection is to increase the number of monitoring, reporting and verification (MRV) providers and technologies. Some firms have gone so far as to invest in building their own MRV systems. But financial institutions might also look at investing in MRV companies that focus on nature, because there will be a clear demand for their services. Indeed, PwC analysis shows that venture capital investment in start-ups working on MRV solutions for nature has been rising since 2018.

Slowing and reversing nature’s decline will require action on many fronts, but it’s clear that ecosystems will suffer until substantially more money is invested to protect them. For that to happen, private investors must be brought to the table, enticed by compelling ideas about value creation; met with larger, aggregated investments; educated through better dialogue with project developers; and emboldened by more reliable, more useful data on the complex natural systems we all depend on.

To learn more, read PwC UK’s report: Accelerating finance for nature: Barriers and recommendations for scaling private sector investment.

The authors thank Jon Williams, Will Evison, Umair Ullah, Alex Clarke, Margarita Velez Acevedo, Ludo Findlay, Lewis Brusby, Eleanor Gill and Nina Newhouse for their contributions to this article.


Accelerating finance for nature

Read PwC UK’s report on barriers to and recommendations for scaling private sector investment.

Creating a nature positive future

Businesses face new risks from nature loss and will need to address the regulatory, consumer and investor response. By putting in place nature positive strategies, business leaders can harness opportunities that create sustainable outcomes for all.

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Ian Milborrow

Ian Milborrow

Sustainability, Partner, PwC United Kingdom

James King

James King

Sustainability, Senior Manager, PwC United Kingdom

Theo Bromfield

Theo Bromfield

Sustainability, Senior Associate, PwC United Kingdom

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