Despite a growing recognition that biological systems underpin economic value, the world is still investing far too little in natural capital. Too often, conservation, restoration and sustainable management projects are judged to be too new, too unproven, and too slow to generate the returns that commercial capital demands.
But with more than half of the global economy underpinned by natural capital and the growing awareness that nature-related risks could carry significant macroeconomic implications, underinvestment has significant ramifications.
Unfortunately, the investment gap for natural capital is not just large; it is growing. At present, for every dollar directed at protecting nature, around 30 are spent degrading it. The scale of the problem is stark. The latest data from UNEP’s State of Finance for Nature 2026 suggests roughly USD 220bn flowed to nature-based solutions in 2023, of which private capital contributed just USD 23bn, against an annual requirement of USD 571bn by 2030.
For investors, policymakers and agribusiness leaders, the central question is whether this gap reflects a genuine absence of viable opportunities or a systematic failure to price them correctly. Here we argue that it is the latter.
The four barriers to natural capital investment
In our experience, four obstacles recur with striking consistency across forests, agro-ecosystems, freshwater, marine, and urban environments.
The first is seemingly limited financial returns: revenue from nature projects often falls short of risk-adjusted expectations, particularly where benefits are diffuse or arrive only after long delays. Natural systems compound slowly, over decades. This sits uneasily with conventional private equity holding periods. Macroeconomic headwinds, such as high interest rates, can compound this problem by penalising illiquid, long-dated assets. The strain this causes can be seen in public markets, where some dedicated biodiversity equity funds saw assets fall sharply in 2025.
The second is a high risk of failure, driven by the complexity of natural systems and by stochastic events such as fire, disease, and extreme weather that are difficult to predict or insure.
The third barrier is high transaction costs. This is particularly true of developmental and community-led projects which frequently span fragmented smallholdings. In these settings, the work of site selection, contract negotiation, verification and payment distribution, if poorly designed or executed, can become prohibitively expensive.
The fourth, and arguably most fundamental, is the undervaluation of nature within conventional accounting frameworks. Because ecosystem services such as pollination, water purification and climate regulation rarely appear on a balance sheet, the assets that generate them are routinely underpriced, a failure that the emerging machinery of nature-related finance is only beginning to correct.
However, when closely examined, the risks attached to natural capital investments are often perceived to be higher than they really are. Limited historical performance data, immature metrics, and weak regulation amplify the sense that investing in natural resources is inherently hazardous. This creates a self-reinforcing cycle whereby underinvestment allows ecological degradation to continue, which raises both perceived and actual risk, which in turn deters the capital that might have arrested the decline.
When risk is overstated, the consequences are significant. Expected returns and hurdle rates are set too high, and projects that may otherwise have been considered viable are screened out before they reach decision-makers.
But it is worth noting that standard risk calculations frequently overlook or underestimate evolving regulatory penalties, subsidies, and fiscal incentives. A blind spot that is, in itself, a significant risk. Just as asset diversification mitigates volatility within a standard financial portfolio, spreading capital across a range of natural systems creates a self-reinforcing hedge against both ecological and financial risk.
Crucially, most conventional models also completely omit the risk-mitigating nature of conservation itself. Protected marine ecosystems stabilise fisheries; healthy watersheds reduce flood exposure; regenerative farming practices buffer against climate shocks. For large-scale projects these benefits can accrue directly to the individual investor but they are rarely considered. When viewed together these analytical missteps result in a structural undervaluation that has little to do with the underlying quality of the projects themselves.
Financialising nature-related risk
If mispricing is the problem, the financialisation of nature-related risk is an emerging solution. Carbon, and more recently biodiversity credits, are emerging as distinct instruments for monetising positive ecological outcomes. The United Kingdom’s Biodiversity Net Gain regime, mandatory since 2024 and requiring a verified 10% uplift secured for at least 30 years, offers one of the most advanced working examples of a compliance-driven market that pulls institutional capital into investing in natural capital. Equally important is the other side of the ledger, penalising harm. The Kunming-Montreal Global Biodiversity Framework commits governments to cut environmentally harmful subsidies by at least USD 500bn a year by 2030, and the EUDR will bar non-compliant commodities such as cocoa, coffee, and soy from the bloc.
Blended finance too has a role to play in addressing deep-seated market misalignments. Its value lies not only in subsidising early-stage returns but also in correcting a market failure in how risk is perceived. When implemented correctly, concessional capital can widen the funnel of investable projects and catalyse the crowding-in of private wealth. In climate-related projects valued above USD 500m where a development bank is present, each dollar of concessional capital has mobilised close to six dollars of private investment, against barely one dollar where no such institution is involved.
Its effectiveness, however, is conditional. If blended finance is to correct mispricing rather than entrench dependency, it must be governed by clear criteria. In short, concessional structures can only be justified where private finance would not otherwise flow. Where they merely sweeten deals that would have happened anyway, they waste scarce public resources, and so, rigorous assessment of both financial and developmental additionality, before and after deployment, is essential.
Equity considerations are equally material. Private capital tends to flow to low-cost, low-risk regions, bypassing places where intervention is most needed. If financial returns from ecosystem services bypass indigenous and local communities, existing inequities may be reinforced. Our experience clearly indicates that projects which genuinely engage with local communities deliver far more durable and ecologically effective outcomes. Governance, transparency and participation should therefore be central considerations when investing in natural capital.
Similarly, the design of public incentives must account for the commercial maturity of different natural capital sectors. There is considerable variation in how investment-ready different ecosystems are. Forestry and agro-ecosystems are generally considered highly investable. They already benefit from clear cash flows, established certification schemes and direct linkages to commodity supply chains, which makes them attractive to institutional investors. Agro-forestry is no less compelling, since it generates monetisable benefits that feed directly into agricultural output while delivering wider environmental gains. Marine and freshwater ecosystems, by contrast, present a far steeper commercial hurdle, held back by immature metrics, weak credit markets and high long-term maintenance costs.
This divergence has produced a bifurcated market, with mainstream private investors gravitating toward forestry and agriculture, and impact-aligned finance more likely to explore the marine, freshwater and urban segments where revenue models remain underdeveloped. If policymakers are to bridge this divide, they will likely need to transition from broad-brush environmental targets to highly targeted, sector-specific de-risking mechanisms.
Repricing nature over time
The case for investing in natural capital ultimately hinges on the accurate pricing of environmental and financial risks. If the rates applied to such projects fail to capture their true risk profiles, the compounding financial weight of future regulatory penalties, and the positive externalities that reduce long-term risk, then underinvestment will continue and the ensuing degradation will continue to raise systemic risk.
If correctly implemented, market-based instruments like carbon and biodiversity credits, alongside blended finance, offer a way out of this cycle. By incentivising environmental stewardship and temporarily lowering the cost of capital, they can encourage the flows needed to establish a track record where none currently exists. Once that performance data accumulates and perceived risk converges on actual risk, premiums will fall and projects can begin to attract commercial capital at market rates. At this point concessional capital can graduate, recycling into the next cohort of natural capital projects.
At Farrelly Mitchell, our agribusiness and natural capital advisory services provide the strategic, technical, and commercial expertise investors, governments and agribusiness leaders need to make informed decisions and achieve sustainable growth. We help clients structure and assess natural capital investments, understand regulatory requirements, develop policy, and identify where ecological value translates into commercial and environmental benefit. With a proven track record across the food and agribusiness value chain, we combine local market insights with global best practices to optimise your operations, address complex challenges, and capitalise on emerging opportunities. Contact our experts today to discuss how we can support your organisation’s continued growth and profitability.
