- There is a lot of talk about nature funding gaps, but this ‘gap-mania’ obscures a more important truth: the problem is not a shortage of capital, but an overflow of capital flowing in the wrong direction.
- Private finance can play a constructive role, for instance by funding productive transformation: financing farm transitions, reforestation, or wetland restoration where risk-adjusted returns exist. It cannot substitute for ongoing payments for public goods like flood protection or simply fill a gap in the public budget.
- The real barriers to nature finance are a knowledge gap: banks, NGOs and governments may lack a shared language. But this is also a willingness gap: the uncomfortable question of who should pay for nature, and who should stop profiting from its destruction.
In the nature-finance world, we’re being beaten over the head with numbers about funding gaps for nature. For example, target 19 of the Kunming-Montreal Global Biodiversity Framework calls on the world to mobilise $200 billion per year for biodiversity by 2030. The Paulson Institute and the Nature Conservancy estimate the annual global funding gap for nature to be between USD 700 and 900 billion per year. Using different calculation methods and assumptions, the EU’s nature funding gap is estimated to be EUR 18.69 billion; and the UK’s is GBP 56 billion. While it is good that there is more attention to funding nature, ‘gap mania’ is getting in the way of real change.
The pull of the funding gap narrative is strong. In this framing, nature’s problem is that there is not enough money flowing to it. If there would be more money, nature would be restored. This funding gap is then characterised as a void that is left by governments, which the private sector should fill with capital. It quickly leads to the conclusion that ecosystems must be turned into commodities or a new asset class to attract private finance and close the funding gap. This is presented as a triple win: governments are helped in their budgeting, private investors make money, and biodiversity is conserved and restored.
However, this narrative ignores that there is plenty of money; it is just financing endeavours that hurt rather than restore nature. UNEP’s recent State of Finance for Nature revealed that in 2023 public and private finance for nature-negative activities like fossil fuels reached US$7.3 trillion. Nature-based Solutions on the other hand, only received US$220 billion. Of this, private finance contributed only US$23 billion. In other words: for every dollar spent safeguarding nature, thirty are spent tearing it down. Without phasing-out destructive funding streams, any ‘funding gap’ will get wider even if more nature is funded. What’s more, the funding gap narrative willingly obscures and protects those who benefit from nature’s destruction.
Still, private finance can play a constructive role in funding biodiversity-restoring activities, but it cannot simply fill gaps in the public budget with capital. However, to understand what private finance can genuinely do, it helps to first understand its nature1.
The nature of private finance
Private finance, or capital, doesn’t chase impact, it chases profits (risk-returns). It does not come in the form of a grant, or as a payment for outcomes. Attracting private finance requires nature-based projects and companies to generate cash flows by delivering goods or services, like food, building materials, flood risk mitigation, carbon, or sometimes even biodiversity itself, where someone wants to pay for them on a market. Even when such business models exist, investors need to be compensated for risks with returns. This may be exacerbated by the inherent uncertainty of biological processes. If this risk-adjusted compensation falls short of other investment opportunities, capital will mostly be allocated elsewhere.
Against return requirements, the costs of commodifying ecosystems loom large. To improve or restore an ecosystem through a market, the system must first be broken down into measurable, tradeable units, which means optimising for a set of inevitably reductionist metrics like habitat categories or carbon sequestration. Ecosystems resist this kind of reductionism, because they are complex and not perfectly understood. Consider for example that an estimated 80% of insect species remain undescribed. Moreover, the same natural area may simultaneously provide water filtration, flood mitigation, carbon sequestration, pest resilience, and recreation to different people and communities.
Watchdogs and gamekeepers
To prevent maximising for metrics at the cost of people or the wider integrity of ecosystems, social and environmental safeguards need to be designed, audited and enforced. Imagine a fox locked out of a farm by a fence. The fox is not malicious, but it is hungry. Can it climb over? Dig a tunnel? Gnaw the wire until it gives? If there is a way in, it will find it. Finance's engagement with natural capital through markets follows the same logic: probing for points of entry where value can most efficiently be realised as returns. Organising high-integrity nature markets is akin to keeping a fox out of a henhouse, because market watchdogs and gamekeepers need to be hired. What begins as an attempt to finance nature efficiently can become an expensive effort to stop market players from exploiting it.
Still, carefully designed market mechanisms can play a supporting role. When they are limited in scope and anchored to regulation-backed public goals, they can support nature restoration. The UK's Biodiversity Net Gain system, which requires construction developers to demonstrate a measurable improvement in biodiversity before receiving planning permission, and the US wetland mitigation market, where developers who damage wetlands must fund equivalent restoration elsewhere, are instructive examples. Private finance plays a supporting role, funding organisations that meet clearly defined and mandatory public obligations. But what makes these models reliable, government oversight, legal embeddedness, penalties for non-compliance, and a constrained focus on specific sectors like construction or infrastructure, is precisely what limits their ability to scale. They are useful models for defined contexts and will help to bring in private sector to fund nature, but they are not a blueprint for closing a system-wide ‘funding gap’ and governance risks remain.
Public investments
Direct public investment can be a cost-efficient alternative way to protect and restore nature, because governments do not need to incur costs to artificially separate ecosystems into tradeable units on markets. Governments and public investment banks can recognise and fund the multiple functions of ecosystems together, without finding a separate market for each. Moreover, public authorities can coordinate investments with a broader toolbox of regulatory powers that markets lack, including zoning, bans, and the enforcement of environmental law. For example, consider Amsterdam’s Waterleidingduinen, a public dune water catchment area managed by the local water authority. It delivers bundled ecosystem services: water provision, biodiversity, recreation, coastal protection, all backed by water tariffs rather than nature markets. That said, tax-funded public budgets alone will not be enough to fund ambitious restoration goals and can be vulnerable to political cycles. This means we need to envision a financial sector that plays the right, constructive role.
Private finance in its proper role
Private finance can be constructive by returning to one of its core functions: the efficient mobilisation of capital. This means transforming savings into productive investment, financing real economic activities rather than trading ownership of assets. In the context of nature, this distinction matters. Governing natural assets through commodification risks steering finance toward land and biodiversity credits speculation, extracting returns from inflating land prices and scarcity rather than generating it through restoration.
Where investments are productive, private finance can earn its place where it can deploy capital more efficiently than the public sector. Private finance typically provides funding for upfront capital expenditures: machinery, planting material, processing facilities or land preparation. This is where private finance fits: funding the transformation of how a farm, forestry operation, or wetland and mangrove developer operates. A local bank lending to a farmer transitioning to agroforestry, financing the tree planting and fencing through the years before the system becomes profitable, is doing something private finance is good at: assessing the borrower, pricing the risk, and deploying capital efficiently. Another role may be bond financing for public or quasi-public institutions implementing regional restoration programmes. Financial institutions can also help manage public nature funds, contributing their risk assessment and structuring expertise without needing to commodify what they finance.
What the bank cannot do is substitute for the ongoing payments that make those operations viable once the capital is deployed. If a business model depends on compensation for public goods like water filtration or flood mitigation, compensation needs to come from public budgets or regulatory obligations for companies and cannot come from extra capital from the financial sector. This points to the harder question the funding gap narrative avoids: who should actually pay for nature, and why aren't they paying already?
The enabling conditions
For more private capital to flow toward nature-restoring activities, the underlying economics need to improve. This means the priority is not attracting more private capital but fixing the conditions that currently make nature destruction the more profitable choice. Reforming the estimated USD 2.5 trillion in harmful subsidies is the most obvious place to start. Agricultural subsidies, for instance, are often allocated based on farm size rather than land stewardship, rewarding scale over ecological outcomes. Redirecting subsidies toward payments for ecosystem services would shift incentives without requiring new public spending.
If private finance or the private sector at-large needs to provide payments for the public goods they enjoy rather than capital, they need to be taxed or made to fulfil certain regulatory obligations like in the BNG system. This is defensible: many industries already depend on healthy ecosystems; they simply don't pay enough for them.
Mind the right gaps
The real barrier to nature finance is not a shortage of capital. It is partly a knowledge gap, both public and private institutions grapple with understanding in detail which forms of conservation, restoration, or nature-based solutions they should and should not finance. Banks, NGOs and public institutions may lack a shared language, which creates misunderstandings about what each can contribute. Funding gap narratives add to this confusion. But it is also, in more sober realism, a willingness gap. The funding gap narrative is convenient because it defers the uncomfortable question of who should pay for nature and it also distracts from who benefits from the destruction of nature. Closing that gap requires naming what the funding gap narrative obscures: who should pay, who currently profits from not paying, and what roles both public and private capital can genuinely play once those questions are answered.
End notes
1. We use the terms 'private' and 'public' finance as a shorthand, but the two are not opposites. They sit on a continuum, and each covers a wide range of actors and instruments. Development finance institutions (DFIs) like Invest-NL, for instance, are publicly owned but invest alongside private capital. Blended finance structures deliberately mix public and private funding to share risk. On the private side, a mission-driven impact investor operates very differently from a hedge fund.