Why in News?
The United Nations Environment Programme (UNEP) released its flagship report titled “State of Finance for Nature 2026,” which highlights a stark imbalance in global financial flows, revealing that for every USD 1 invested in protecting nature, nearly USD 30 is spent on activities that destroy it.
Key Highlights
Nature-Negative Finance (Scale of the Problem)
- In 2023, global financial flows that damage nature—such as fossil fuel extraction, deforestation, and unsustainable agriculture—reached USD 7.3 trillion, around 7% of global GDP.
- The private sector is the largest contributor, accounting for USD 4.9 trillion, mainly in energy, utilities, and basic materials.
- Governments provide about USD 2.4 trillion per year in Environmentally Harmful Subsidies (EHS).
- These subsidies are dominated by fossil fuels, followed by unsustainable agriculture and water subsidies.
- Such subsidies distort market signals, making environmental damage cheaper and conservation less attractive.
Nature-Positive Finance (Current Status)
- Global investment in Nature-based Solutions (NbS) is only about USD 220 billion.
- Harmful financial flows outweigh nature-positive investments by roughly 30:1, showing a severe imbalance.
- There are some positive trends:
- Spending on biodiversity and landscape protection rose by 11% between 2022 and 2023.
- International public finance for NbS in 2023 was 22% higher than in 2022 and 55% higher than 2015 levels.
Finance Gap for Nature-based Solutions
- NbS finance is overwhelmingly public-sector driven, with governments contributing about 90%.
- Private investment in NbS remains very limited, at only 10% of total funding.
- To meet global targets, NbS investment must increase 2.5 times, reaching USD 571 billion per year by 2030.
Global Targets Driving NbS Demand (Rio Conventions)
- The Rio Conventions, agreed at the 1992 Earth Summit, focus on climate stability, biodiversity conservation, and land restoration.
- The UN Framework Convention on Climate Change aims to keep global warming below 2°C, preferably 1.5°C.
- The Convention on Biological Diversity targets conserving 30% of land, waters, and seas and restoring 30% of degraded ecosystems by 2030.
- The UN Convention to Combat Desertification aims to restore 1.5 billion hectares of degraded land by 2030.
What are Nature-based Solutions (NbS)?
Definition (in simple terms)
Nature-based Solutions (NbS) are actions that work with nature rather than against it. They involve protecting, managing, or restoring natural or human-modified ecosystems so that they solve real problems such as climate change, food shortages, or disaster risks. At the same time, they improve human well-being and protect biodiversity.
Examples
- Mangrove restoration: Restoring mangroves helps protect coastlines from storms and floods, while also absorbing and storing carbon, which helps fight climate change.
- Agroforestry: Growing trees alongside crops increases farm productivity and food security, while improving soil quality and supporting biodiversity.
- Green urban spaces: Parks, green roofs, and urban forests cool cities by reducing the heat-island effect and make urban areas healthier and more livable.
What are the Challenges in Scaling NbS Finance?
- High due-diligence costs: Nature-based projects are complex and location-specific. Because there are no common standards and every ecosystem is different, investors must carry out customised and costly studies. This makes NbS projects far more expensive to assess than conventional infrastructure projects and discourages large-scale private investment.
- Unproven asset class: NbS is still new as an investment category and lacks long-term performance data. Since there is no clear record of stable, risk-adjusted returns, rating agencies struggle to assess risk properly. As a result, investors demand higher returns to compensate for uncertainty, making projects harder to finance.
- Liquidity constraints: Investments in nature usually require long time horizons of 10–20 years. There is no active secondary market to sell or exit these investments early, creating a lock-in risk. This is unattractive to private equity investors who typically look for exits within 3–5 years.
- Currency and sovereign risk: Most high-impact NbS opportunities are located in the Global South, while most investment capital comes from the Global North. This exposes investors to exchange-rate fluctuations and country-level political or policy risks. Hedging against these risks is costly and often reduces overall returns.
- Lack of measurable data: Unlike carbon emissions, biodiversity and ecosystem health are difficult to quantify. Investors do not yet have clear, standardised metrics to measure returns or outcomes, making it hard to judge the financial value of nature-based projects.
What are the Implications of Low NbS Finance for India?
- Subsidy Paradox
- India faces a serious mismatch between its environmental goals and fiscal choices. Large subsidies for chemical fertilisers and free electricity for groundwater pumping continue to encourage overuse of soil and water, while spending on nature-positive areas—such as the environment ministry or organic farming—remains relatively small. In effect, public money is being used to damage the very land and aquifers on which the economy and food security depend.
- Over-reliance on Public Finance
- Unlike many developed economies where private capital is slowly entering conservation and biodiversity finance, India’s nature-based solutions are funded almost entirely by the government. Programmes like the Compensatory Afforestation Fund Management and Planning Authority (CAMPA) dominate funding. This places heavy pressure on public finances, while private sector participation through CSR or impact investing remains minimal.
- GDP and Employment Exposure Risk
- India’s economy is deeply dependent on nature. More than half of the workforce is engaged in agriculture and allied activities, giving the country a very high dependence on ecosystem services such as pollination, soil fertility, and groundwater. If these natural systems fail, the economic and financial shock would be felt much faster and more severely than in highly industrialised economies.
- Absence of a Clear Green Taxonomy
- India is still developing a formal “green taxonomy” that clearly defines what qualifies as environmentally sustainable. In the absence of such standards, banks and financial institutions may fund projects that appear green but actually harm nature. This risk of greenwashing reduces investor confidence and prevents genuine global capital from flowing into Indian nature-based projects.
- Fiscal Federalism Paradox
- There is also a gap between national commitments and local realities. India’s international environmental pledges are made by the central government, but the responsibility for managing land and water largely lies with state governments. Many states, facing financial stress, prioritise mining, construction, or real estate for quick revenue, even when this conflicts with long-term conservation goals promoted at the national level.
What Measures can Effectively Increase Nature-based Solutions (NbS)?
- Nature Transition X-Curve
- The UN Environment Programme proposes a “Nature Transition X-Curve” approach, which means doing two things at the same time. First, governments should rapidly reduce and phase out financial flows that damage nature, such as harmful subsidies. Second, they should actively expand markets and investments that restore and protect ecosystems. The idea is to redirect money away from destructive activities and towards regenerative ones, so that economic growth is no longer tied to environmental damage.
- Pricing Environmental Damage
- Environmental harm is often cheap because its real costs are not reflected in prices. To fix this, governments can introduce tools like carbon taxes or nature-liability charges. By making pollution and ecosystem destruction more expensive, these measures encourage businesses to conserve nature and invest in cleaner, sustainable practices.
- Mandatory Nature-Related Disclosures
- Governments should require companies and financial institutions to disclose how their activities depend on and impact nature. These disclosures should follow global frameworks such as the Taskforce on Nature-related Financial Disclosures. This would ensure that investors and shareholders clearly understand the risks companies face from nature loss and the damage they may be causing.
- Innovative Financial Instruments
- To attract large-scale private investment, new financial products need to be expanded. Instruments such as green bonds, sustainability-linked loans, and biodiversity credits can help bring mainstream investors into nature-positive projects. Public institutions like the World Bank or national development banks can further support this by offering first-loss guarantees or low-cost capital, reducing risk for private investors in nature-based solutions.
- Standardised Metrics for Nature
- There is a need to move beyond measuring only carbon emissions. Standard, science-based indicators for biodiversity—such as measures of species abundance—should be adopted. Common metrics make it harder for companies to exaggerate environmental benefits and help investors distinguish genuinely sustainable projects from greenwashing.
- Integrated and Coherent Policy Making
- Finally, government policies must work together rather than at cross-purposes. Ministries dealing with finance, agriculture, and energy should align their decisions with global biodiversity goals under the Kunming-Montreal Global Biodiversity Framework. This ensures that public money is not used by one arm of government to damage nature that another arm is trying to protect.
Conclusion
The State of Finance for Nature 2026 highlights that today’s economic systems are still channeling money toward activities that damage the environment. For India, this is a clear warning. To protect its natural resources and long-term growth, India needs to apply the Nature Transition X-Curve approach—phasing out harmful subsidies while scaling up investments that restore nature. This shift would help move the country away from an economy that unintentionally subsidises environmental damage toward one that supports nature-positive, sustainable growth, while also protecting biodiversity and supporting India’s USD 5-trillion economy ambition.
FAQ’s
- What does the State of Finance for Nature 2026 report show?
The report reveals that most global financial flows still support activities that harm the environment. Investments damaging nature far exceed those protecting it, with harmful finance outweighing nature-positive spending by about 30 times. - What are Nature-based Solutions (NbS)?
Nature-based Solutions are ways of working with nature—by protecting, restoring, or managing ecosystems—to solve problems like climate change, food insecurity, and disaster risks, while also improving biodiversity and human well-being. - Why is private investment in NbS so limited?
Private investors are discouraged because NbS projects are costly to assess, lack common measurement standards, take many years to generate returns, and offer few exit options due to the absence of secondary markets. - Why is low NbS funding especially risky for India?
India’s economy and livelihoods depend heavily on healthy ecosystems. If natural systems like soil, water, and biodiversity degrade further, it could seriously affect agriculture, employment, and overall economic stability.
