In a 2022 agreement, an international coalition of countries set a daunting goal: to come up with an additional $700 billion per year to address biodiversity loss. These funds are needed to stave off extinctions of about one million species and preserve nature’s benefits to humanity, including food, medicine, clean water, and protection from floods and other hazards. “Biodiversity is fundamental to human well-being, a healthy planet, and economic prosperity for all people,” the authors of the agreement wrote.
The participants pinned their hopes partly on private financing sources, such as companies, nonprofits, and individual investors. “There’s a huge biodiversity financing gap,” says Anya Nakhmurina, an associate professor of accounting at Yale SOM. “Governments simply lack the resources to close it on their own, given the many competing demands on public funds—some of which address far more immediate problems.”
But private investment will flow to conservation only when there’s potential for financial return. In a new study, Anya Nakhmurina, Eli Fenichel of the Yale School of the Environment, and Dale Manning of the University of Tennessee explore a strategy that could allow investors to support conservation and make a modest profit.
For the study, the researchers focused on a specific environmental threat: white-nose syndrome (WNS), a fungal disease that has devastated bats in parts of North America. The team found that if investors had bought municipal bonds from counties plagued by WNS, then financed conservation operations to restore bats in those areas, they could boost the value of their bonds and sell them at a profit.
“There’s a pathway to thinking about financing biodiversity,” Nakhmurina says.
Municipal bonds are issued by local governments to help finance infrastructure such as roads, bridges, and sewer systems. Investors loan money to the government at a certain interest rate, and issuers later pay them back with money from tax revenue. For their study, Nakhmurina’s team focused on bonds issued by counties.
The interest rate for bonds varies by county and is set based on its perceived financial stability. If investors are worried about whether the county can repay the loan, they’ll demand a higher interest rate to compensate for the higher risk. For example, a county with a declining population, which is expected to lead to lower tax revenue, would be seen as riskier. The difference between a particular county’s interest rate and the rate on low-risk government debt is called the spread.
But the spread can fluctuate as conditions change. If the county’s fortunes take a turn for the better, the interest rate on newly issued bonds decreases. When that happens, the value of bonds issued in previous years—which are still paying interest at the higher rate—increase. So an investor holding the older bonds can sell them at a profit.
These shifting conditions in the municipal bond market suggested an intriguing possibility for Nakhmurina and her co-authors. They speculated that biodiversity in a county could influence the spread over time—and thus the value of investors’ bonds.
For instance, when white-nose syndrome first arrived in the U.S., the impact was “very sudden, unexpected, and devastating,” Nakhmurina says. Normally, bats eat pests on farms, which improves crop yields. When WNS decimates bat populations, farmers have to buy more pesticides, driving up their costs. Or they may decide, after evaluating the higher expenses, that they will plant less. The farms’ profits decrease, and so do their expected property tax payments to the county.
The researchers figured that investors tracking conditions in the county “will price this information in,” she says. “Loss of county revenue makes bond investors nervous.” In other words, the county would be seen as riskier and would have to pay higher interest. Notably, investors don’t need to know that a collapse in bat populations is behind the county’s increasing riskiness. It is enough for them to observe its economic consequences.
To test their hypothesis, Nakhmurina’s team examined data on the spreads of municipal bonds issued by U.S. rural counties. They tracked if and when WNS had been detected in each county. “If this is something that the market recognizes, we should see a reaction quickly,” she says. “That’s exactly what we find.”
In counties that had lost bats to WNS, municipal bond spreads increased by an average of 0.1147 percentage points compared to counties that hadn’t. That number is equivalent to about one-quarter of the average spread. The interest rates “increase immediately,” she says, and they stay elevated throughout the six-year study period.
This is where private financing for biodiversity restoration could come in. An investor could buy those bonds at the high interest rates, then fund conservation projects in the county to help control the disease and restore the bat population. That would increase farm profits and property tax revenue. The county would be seen as a safer borrower, interest rates would fall, and the value of the investors’ bonds would rise.
How much profit might the investor make? The researchers sketched out some possible numbers: Let’s say the investor buys a $1 million bond at an interest rate of 3.04%. The cost of the conservation projects might run from around $9,500 to $18,000. If bat restoration caused the interest rate to fall by 0.1147 percentage points to 2.92%, the value of the bond would increase by roughly $13,800.
Assuming the cost of the conservation funding was on the lower end, the investor would pocket a few thousand dollars. That’s a modest gain, but for an environmentally minded investor, it’s a viable pathway, Nakhmurina says.
We need all the financing options we can get because “biodiversity is decreasing unimaginably quickly,” she says. This strategy would allow private investors “to make a little bit of profit while also conserving some species.”
“The Yale School of Management is the graduate business school of Yale University, a private research university in New Haven, Connecticut.”
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