Natural capital refers to the world’s stocks of natural assets, including geology, soil, air, water, and all living organisms. These assets form the foundation of ecosystems that provide essential goods and services to humans, known as ecosystem services. Examples of these services include clean water, fertile soil, pollination of crops, climate regulation, and flood protection, among many others. Historically, the private sector has not been actively involved in funding natural capital conservation and restoration projects due to various reasons, such as the public goods nature of the benefits generated by these projects, their low liquidity, extremely long investment horizons, and a lack of knowledge among private investors. However, there is growing interest among public sector players in these projects due to the increasing awareness of the importance of natural capital conservation and restoration for the long-term sustainability of businesses.
According to the World Bank (2024), investing in ecosystem restoration not only contributes to the overall sustainability of human society but also provides numerous benefits to private businesses. Such investments help businesses achieve net-zero targets, manage nature-related risks, and uncover new business opportunities. By supporting ecological restoration, private capital can enhance corporate sustainability and drive innovation in conservation practices.
However, conservation and restoration projects often do not align with typical financial valuation models used in investment analysis by private investors. There is a need for a framework to translate ecological concepts into terms that are understandable within conventional financial contexts. This issue has been explored in academic research. For instance, Löfqvist et al. (2023) argues that one of the primary barriers to investing in restoration projects is the absence of a clear Return on Investment (ROI) profile, a measure routinely employed by private investors to assess conventional projects.
ROI is a financial metric used to evaluate the performance of an investment, measuring the benefit generated relative to its cost. In conventional business projects, this benefit is typically quantified as net profit, and ROI is expressed as a percentage using the formula: ROI = Net Profit / Cost of the Project.
However, assessing ROI for conservation and restoration projects involves greater complexity. While costs are generally defined and measured consistently, the benefits vary with context. Some projects yield quantifiable monetary benefits, while others provide non-monetary benefits that are equally significant. It’s crucial to note that even when benefits cannot be monetized, ROI remains valuable for guiding financial resources towards the most cost-effective opportunities. This strategic allocation of resources is especially critical when funding is limited. Moreover, corporate philanthropy can use ROI metrics to identify opportunities that maximize the environmental or social impact for each dollar invested, even when the benefits are not expressed in monetary terms.
There are numerous examples in academic research that show how benefit measurement varies with context. For example, a study by Jaeger & Scheuerell (2023) examines projects aimed at enhancing the abundance of salmon and steelhead populations through habitat restoration, hatchery releases, and other measures in the Columbia River Basin. The benefits of these restoration projects are measured by the number of returning adult salmon and steelhead at Bonneville Dam.
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Background Information Salmon and steelhead have a captivating life cycle that involves a journey from freshwater to the ocean and back again. However, their populations in the Columbia River Basin have experienced a decades-long decline. This decline has been caused by historical overharvesting, dam construction blocking migration routes, and habitat loss and degradation from activities like farming, logging, and mining. These factors, along with other human-induced and environmental pressures, have led to a decline in the abundance of these fish species in the region. Conservation efforts and restoration projects are working to address these challenges and restore the populations of salmon and steelhead in the Columbia River Basin. |
Another example is provided by Beck et al. (2022), which demonstrates using ROI to evaluate coral reef and mangrove restoration projects for coastal protection in the Caribbean region.
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Background Information
Mangroves and coral reefs act as natural barriers that help reduce the impact of waves, storm surges, and flooding along coastlines. Mangroves, with their dense root systems and above-ground vegetation, can dissipate wave energy and stabilize shorelines, while coral reefs provide a buffer against wave action, breaking up incoming waves and reducing their intensity before reaching the shore. By absorbing and deflecting wave energy, mangroves and reefs play a crucial role in protecting coastal communities and infrastructure from flooding and erosion. |
The benefits of these restoration projects are measured by assessing the flood protection provided by coral reefs and mangroves using the “expected damages approach,” a method commonly used in the insurance and engineering sectors. This involves using models to predict flooding on coastlines with and without these natural habitats for different types of storms that might occur once every 10, 25, 50, or 100 years. The study creates flood maps showing the depth and extent of flooding for these scenarios at a high resolution of 30 meters. These maps are then combined with socioeconomic exposure data from the World Bank to make damage estimates. Since mangroves and coral reefs help reduce damages, the benefits of restoration projects are quantified by calculating the annual expected damage reduction over a 30-year project lifespan at a 4% discount rate, which is later adjusted to conduct sensitivity analysis.
Kroeger et al. (2019) offers a comprehensive example of evaluating a conservation project using ROI. The study details the technical analysis necessary for calculating a monetized ROI for the Payment for Watershed Services (PWS) program implemented in the Camboriú watershed, located in Santa Catarina State, Brazil. This initiative focuses on interventions such as riparian fencing for cattle exclusion and restoration of degraded upland forests through fencing, tree planting, and enrichment to reduce sediment loads and enhance water quality in the watershed. The paper employs Total Suspended Solids (TSS) concentrations as a metric to assess sediment loads in water.
The study examines land use patterns in the watershed from 2003 to 2012 to understand trends in land use conversion, such as transitions from forest to pasture or impervious areas (potentially representing urban areas). This analysis is used to predict land use changes in the absence of conservation interventions (the counterfactual scenario) up to the year 2025. By projecting these patterns, the resulting land use/land cover map, is input into the Soil and Water Assessment Tool (SWAT), a widely used hydrologic model, to identify areas where interventions can generate the largest reduction in TSS concentrations relative to the counterfactual scenario. This targeted approach aims to maximize the effectiveness of interventions in sediment control within the watershed by the year 2025.
The study then utilizes the SWAT model to assess the impact of interventions on TSS concentrations at the EMASA municipal water and sanitation company intake. By inputting data on watershed characteristics and land use, the SWAT model can predict how these factors will affect TSS concentrations at the water intake point. The TSS in the treated areas is then compared to that of the counterfactual scenario to calculate the impact of the conservation interventions. In other words, the study calculates the impact of these interventions on TSS levels by comparing the TSS concentrations in the intervention scenario (areas with conservation interventions) to those in the counterfactual scenario (without interventions).
The impact of the conservation interventions in the Camboriú watershed is translated into benefits in monetary terms, which include reduced water treatment costs, revenue gains from increased water sales during peak months, and avoided capital costs that would have been incurred for expanding the treatment plant capacity if the sediment control measures implemented through the program were not in place. The program costs include a variety of expenses associated with its implementation and management, such as design, intervention implementation, maintenance, and payments to landowners. Benefits and costs were calculated for different time frames and discounted to their present value using Brazil’s social consumption discount rate. ROI is then calculated by dividing the present value of benefits by the present value of costs.
Another good example is Goldstein et al. (2008). The paper presents a framework for evaluating various investments in ecological restoration, focusing on a case study of reforestation in Hawaii. The study underscores the need to consider both the projected returns of restoration actions and the associated financial costs, as well as the potential offsetting of costs through subsidies and revenue streams. By combining ecological and economic data, the paper shows how ROI rankings can vary based on conservation objectives, highlighting the importance of strategic fund allocation for restoration projects. We refer interested readers to the original paper for more details.
Many academic studies, including some mentioned above, emphasize the importance of incorporating opportunity costs into the total costs when calculating ROI. This ensures a comprehensive evaluation of investments by accounting for the potential benefits foregone from alternative uses of resources. For example, Jaeger & Scheuerell (2023) considers the opportunity costs of resources allocated to restoration activities, such as foregone revenues from power generation when water is diverted away from power-generating turbines for fish passage and habitat enhancement. Similarly, Kroeger et al. (2019) incorporates the official opportunity cost of pastureland when calculating payments to landowners, reflecting its value for agriculture or animal husbandry.
It is important to highlight that well-managed conservation and restoration projects have the potential to generate a positive ROI. For example, Beck et al. (2022) demonstrated that many locations could achieve a positive ROI even with restoration costs amounting to hundreds of thousands of dollars per hectare for mangroves and millions of dollars per kilometer for reefs. These findings underscore the economic viability of investing in natural capital, highlighting the dual benefits of environmental restoration and economic returns.
References:
Beck, M. W., Heck, N., Narayan, S., Menéndez, P., Reguero, B. G., Bitterwolf, S., Torres-Ortega, S., Lange, G., Pfliegner, K., McNulty, V. P., & Losada, I. J. (2022). Return on investment for mangrove and reef flood protection. Ecosystem Services, 56, 101440. https://doi.org/10.1016/j.ecoser.2022.101440
Goldstein, J. H., Pejchar, L., & Daily, G. C. (2008). Using return-on-investment to guide restoration: a case study from Hawaii. Conservation Letters, 1(5), 236–243
Jaeger, W. K., & Scheuerell, M. D. (2023). Return(s) on investment: Restoration spending in the Columbia River Basin and increased abundance of salmon and steelhead. PLOS ONE, 18(7), e0289246. https://doi.org/10.1371/journal.pone.0289246
Kroeger, T., Klemz, C., Boucher, T., Fisher, J. R. B., Acosta, E., Cavassani, A. T., Dennedy-Frank, P. J., Garbossa, L., Blainski, E., Santos, R. C., Giberti, S., Petry, P., Shemie, D., & Dacol, K. (2019). Returns on investment in watershed conservation: Application of a best practices analytical framework to the Rio Camboriú Water Producer program, Santa Catarina, Brazil. Science of the Total Environment, 657, 1368–1381
Löfqvist, S., Garrett, R. D., & Ghazoul, J. (2023). Incentives and barriers to private finance for forest and landscape restoration. Nature Ecology & Evolution, 7(5), 707–715. https://doi.org/10.1038/s41559-023-02037-5
World Bank (2024). Blueprints for Private Investment in Ecosystem Restoration : Lessons from Case Studies (English). Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/099031424202517999/P1777061820a410fa1a50e1580bed5ade8a
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