Working Paper: NBER ID: w31022
Authors: Caroline Flammer; Thomas Giroux; Geoffrey Heal
Abstract: The use of private capital to finance biodiversity conservation and restoration is a new practice in sustainable finance. This study sheds light on this new practice. First, we provide a conceptual framework that lays out how biodiversity can be financed by i) pure private capital and ii) blended financing structures. In the latter, private capital is blended with public or philanthropic capital, whose aim is to de-risk private capital investments. The main element underlying both types of financing is the “monetization” of biodiversity, that is, the extent to which investments in biodiversity can generate a financial return for private investors. Second, we provide empirical evidence using deal-level data from a leading biodiversity finance institution. We find that projects with higher expected returns tend to be financed by pure private capital. Their scale is smaller, however, and so is their expected biodiversity impact. For larger-scale projects with a more ambitious biodiversity impact, blended finance is the more prevalent form of financing. While these projects have lower expected returns, their risk is also lower. This suggests that the blending—and the corresponding de-risking of private capital—is an important tool for improving the risk-return tradeoff of these projects, thereby increasing their appeal to private investors. Finally, we examine a set of projects that did not make it to the portfolio stage. This analysis suggests that, in order to be financed by private capital, biodiversity projects need to meet a certain threshold in terms of both their financial return and biodiversity impact. Accordingly, private capital is unlikely to substitute for the implementation of effective public policies in addressing the biodiversity crisis.
Keywords: Biodiversity; Finance; Private Capital; Blended Finance; Sustainable Finance
JEL Codes: G11; G23; G3; Q14; Q2; Q5; Q57
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher expected returns (G19) | financing through pure private capital (G32) |
| financing through pure private capital (G32) | lower biodiversity impacts (Q57) |
| Larger-scale projects (C55) | financing through blended finance (O16) |
| financing through blended finance (O16) | lower expected returns (G12) |
| financing through blended finance (O16) | lower risks (G22) |
| Private capital must meet thresholds in financial return and biodiversity impact (O16) | attract private capital (F21) |