Post date 25 May 2026 (original LinkedIn date)
Original LinkedIn version· 2,223 words
‘Mandolin Rain’ by Bruce Hornsby and the Range, released in 1986 on the album The Way it is. Still a favourite
After a weekend of celebration for my son’s 19th birthday, I let him choose this week’s musical lyric connection – prize to anyone that gets it! A number of strands have come together for me this week – call it the gift of spending time out of the office and ‘in the field’ at ecology calling.’s amazing Investing IN Nature event delivered by the indefatigable chief chief Joe Huddart, PhD and the fyreside team.
First up, Sebastian Mynott‘s fabulous recent piece on matching the geometry of financial structures to biophysical systems provided such clarity on how we should view the nexus of nature and investment. It also prompted an exchange that I want to run with. Two threads emerged in the comments: one on whether market mechanisms and infrastructure-style governance can coexist in the same instrument, another on how pricing mechanisms vary across structural types. Taken together, it struck me that they converge on a question that our little field has been circling for several years without quite resolving. Maybe the real question is whether nature finance has been arguing about the wrong thing?
The same conceptual move is now visible across the wider literature. And so we come to my second reference this week, namely Prof Nicola Ranger‘s recent commentary for Earth Capital Nexus arguing for treating nature as the UK’s fourteenth form of critical national infrastructure – think of it as a stabilising system underpinning growth and wellbeing, and one that the standard framing of ‘unpriced externalities’ is structurally too weak to protect. It was a real pleasure to catch up with Nicola and her team last week. Lastly, let’s turn our attention to Harrison Carter and colleagues’ new review in Nature Reviews: Biodiversity that takes a parallel cut from the financing side, cataloguing the return-seeking biodiversity finance mechanisms (loans, bonds, equity, credits) and noting that virtually every one of them carries unresolved commercial, ecological and social risks. Read together with Mynott’s piece, these feel like three vantages on a single structural question: how does the financial architecture match what the biophysical asset actually is?
Two layers, not two camps
Much of the public debate has been framed as binary. Are biodiversity and resilience instruments best understood as commodity-style credits, with markets producing price discovery and liquidity? Or as infrastructure-style obligations, governed by long-duration contracts and institutional architecture? I’ve argued before for foundations built on the latter with the former providing the icing on the cake. The voluntary carbon market controversies of the past few years have hardened this into a bit of a tribal divide.
Mynott’s piece (and the exchange in the comments) perhaps pointed at a neater framing. US wetland mitigation banking, frequently held up as a relatively well-functioning market, I think actually demonstrates both layers coexisting. The stewardship infrastructure (legal liability for bank operators, monitoring, geographic equivalence rules, regulatory enforcement, real consequences for non-compliance) sits beneath the tradable credit layer. The credits handle price discovery and obligation transfer. The infrastructure ensures that what is being transferred has meaning. Take the infrastructure layer away and the commodity layer floats free.
Fungibility, useful as a simplification when appropriately bounded by ecologically meaningful equivalence and defended by regulation, becomes ‘ecological fiction’ without them. That, more or less, is the story of the voluntary biodiversity and carbon credit markets that have struggled most visibly with integrity. Carter et al. document the pattern across return-seeking biodiversity instruments, and note that even within the regulated markets, such as US wetland banking or English Biodiversity Net Gain, competing self-mitigation pathways under less rigorous standards erode the demand for off-site credits, exposing the limits of the architecture even when it is present. The point is not that the wetland banking architecture has failed (clearly it hasn’t having survived several decades and governments of different hues) but that its commercial scale is not unconditional: it depends on regulators being willing to defend the equivalence boundaries the architecture rests on.
If you think about it, the reverse failure also exists. Pure stewardship without any market mechanism can become slow, politically contested, and structurally unable to surface cost variation between providers. Ranger’s Lough Neagh case sits at the harder end of that spectrum: the source of drinking water for around 40% of Northern Ireland, three consecutive years of toxic algal blooms, antibiotic-resistance genes detected in the water column, and an agri-food intensification strategy that has continued to receive public support while the ecology of the catchment has collapsed. The market failures Ranger lists (non-excludable benefits, diffuse pollution sources, non-linear ecological thresholds, fragmented governance) read as a perfect description of why neither the commodity layer nor the infrastructure layer has done its job, and the asset has been left effectively unmanaged.
Both layers do necessary work. Most design failures in nature finance can be traced to running one layer without the other, or, as in Lough Neagh, neither.
Pricing mechanisms follow geometry
The second thread in the exchange concerned price-setting. If infrastructure-style contracts are not pure commodity markets, how does one ensure contributions are calibrated to value? Seb’s response was that each structural geometry implies a different appropriate pricing mechanism, and the financial analogues, laid out carefully, are already familiar.
1. Availability-style structures: (NYC Catskills against avoided filtration capex; Munich’s Stadtwerke against alternative groundwater treatment) these are priced competitively against the counterfactual cost of engineered substitutes. The mechanism is the same one used in PFI and PPP procurement: tender against a defined service specification.
2. Capacity-style structures: (England’s ELMS natural flood management options; Australian drought reserves; and Resilience Purchase Agreements with corporates whose facilities have direct catchment dependency) these arguably lend themselves to auction-based mechanisms analogous to power market capacity auctions.
3. Stewardship-style structures: (multi-utility watershed authorities; irrigation districts; reinsurance pools) these use negotiated contributions calibrated to dependency. The closest financial analogue is the catastrophe reinsurance pool.
4. Parametric structures: (the Mesoamerican Reef Insurance; the African Risk Capacity drought facility) these use actuarial pricing against threshold probability, the same machinery that prices catastrophe bonds.
Each is a genuine pricing mechanism. None requires a continuous spot market in tradable units to function. In real deals, they braid deliciously: a single contract may carry availability-style pricing for routine maintenance, auction-style logic for incremental capacity, and parametric triggers for activation events.
I think that a couple of observations from the additional literature can sharpen our thinking. Carter et al. report that a biodiversity-focused private equity firm required a mean internal rate of return of 14.7% on investments taken without external support, and still 11.9% on blended-finance deals where third parties absorbed major project risks. That is the commercial-return floor the pure commodity-credit pathway has to clear, and part of why infrastructure-style contracts tied to a specific buyer’s dependency (rather than to a fungible market) are emerging as a more tractable structure for many real projects. Carter et al. also separate impact risk (the project failing to deliver intended outcomes) from measurement risk (outcomes being inaccurately assessed). Both sit inside Mynott’s verification questions, but the second is the one I see practitioners most often underpricing.
What does this actually change?
For corporate buyers and asset owners, I believe that this reframes the procurement question. It is not ‘should we buy biodiversity credits or not?’, rather it is ‘do the credits or contracts we are being offered sit on top of infrastructure-layer governance, or do they float free of it?’. Where the infrastructure layer is present (binding obligations, monitored performance, enforceable consequences, institutional capacity), both contract-style and credit-style instruments can be sound.; where it is absent, neither is. And so the integrity question sits upstream of the instrument question.
This matters particularly as more corporate buyers move from voluntary carbon markets toward direct nature-based resilience instruments tied to their own dependencies. Once nature is understood as stabilising infrastructure rather than simply as scenery, the investment case becomes clearer: what is being bought is not a moral purchase or a co-benefit but resilience tied to balance-sheet exposure. A Resilience Purchase Agreement on a flood-protected catchment, an availability-style contract on a water quality service, a parametric trigger on a coastal asset - each depends, for its integrity, on the same infrastructure-layer architecture that gives wetland banking credits their meaning. The difference is that the buyer is paying for a service tied to their own balance sheet rather than for a unit in a fungible market. The geometry is tighter, while the infrastructure-layer demands are no smaller.
Carter et al. note that “a large proportion of biodiversity conservation and restoration projects are unlikely to attract commercial investment” and that public investment and philanthropy will remain crucial. I don’t think we’ll have anyone arguing with that. Ranger’s UK numbers make this concrete: an estimated annual finance gap for nature recovery of £56 billion against £876 million of public spending. Part of what tighter-geometry instruments do is shift some of that gap onto the private balance sheets of buyers whose own dependencies are at stake, without pretending this displaces the need for public underwriting at the system level.
Three problems treated as design variables
Mynott named three unresolved problems that sit within shorter contractual time horizons than the biophysical systems they govern: residual liability allocation, post-contract stewardship continuity, and pricing under non-stationary system behaviour. None of these is unique to nature finance. Each has a partial analogue in mature infrastructure or insurance finance, and none is fully resolved there either, but the resolution direction is reasonably clear.
1. Residual liability maps onto the aftercare and decommissioning regimes that already govern mining, landfill and nuclear assets. The discipline is to nest the obligation in three layers: an operational contract with a defined term; a durable legal covenant on the land or asset that survives the contract (in the conservation-easement tradition); and an aftercare fund capitalised during the contract and drawn on after it. Thankfully the contract finances the work, the covenant binds the obligation, and the fund covers the residual. Carter et al.’s observation that “most bonds are inherently short-term mechanisms, creating long-term sustainability risks after bond maturity, without a clear transition to revenue-generating activities or new funding” identifies precisely the gap that this three-layer design closes.
2. Post-contract stewardship continuity is a question about which entity carries institutional permanence. The Catskills programme has run continuously for nearly three decades because the institutional architecture (New York DEP, watershed councils, land trusts) outlasts individual contracts. The same is true of any regulated utility: operators rotate, the regulated asset base is permanent. The design discipline is to vest primary obligation in a structurally permanent entity (statutory body, utility, land trust, or, at scale, a public investment vehicle such as the National Wealth Fund as proposed by Ranger) and treat the contract as a renewable tool within that institution rather than as the institution itself.
3. Pricing under non-stationarity is, I think, the hardest of the three to solve. Insurance markets reprice annually (although it is incredibly positive to see providers like DUAL Group working to a 10-year horizon), catastrophe bonds now embed climate-loaded loss models, and CfDs include indexation. The design discipline for biophysical systems is to replace fixed pricing with structured repricing: staged contracts with mandatory review cadence, indexation tied to ecological state variables, explicit triggers for renegotiation when those variables breach defined thresholds. Real-options thinking helps too (and I’m starting to see some really interesting work in this area related to nature), treating the contract as a series of renewable commitments rather than a single long-dated obligation. The ‘causal revolution’ in conservation impact evaluation that Carter et al. describe is exactly the science feed this approach needs: better counterfactuals over time, ingested into the contract through review cycles.
None of these design moves resolves the underlying problem on its own. However, together they convert three unresolved obstacles into three sets of design variables, each handled with robust machinery the wider infrastructure finance world has been building for decades. No need to reinvent the wheel - we have existing examples to build from!
The discipline this implies
If there is a single design discipline to take from this exchange and the wider literature it sits within, it is to stop treating the contract form, the pricing mechanism, and the institutional architecture beneath them as separable choices. Ranger states the point bluntly: blended finance without regulatory floors will not work. This is the same observation Mynott makes about enforcement being the system: the geometry frame runs in both directions. The structural properties of the biophysical system constrain which financial structures will fit. The structural properties of the institutional environment (enforcement capacity, monitoring infrastructure, legal liability, regulatory floors) constrain what those financial structures can actually deliver. Time for us to put Nature finance in to proper practice!
References
Mynott, S. (2026). ‘Contracts, not credits: matching the geometry of financial structure to the geometry of biophysical dependency’. LinkedIn: https://www.linkedin.com/pulse/contracts-credits-matching-geometry-financial-structure-mynott-ys1ne/?lipi=urn%3Ali%3Apage%3Ad_flagship3_detail_base%3BT9veN1fgQai9bSuuvxCpIw%3D%3D
Ranger, N. (2026). Nature as critical infrastructure: redesigning how the UK invests in what it depends on’. Earth Capital Nexus / Grantham Research Institute, LSE, 31 March 2026. https://earthcapitalnexus.org/commentary/nature-as-critical-infrastructure-redesigning-how-the-uk-invests-in-what-it-depends-on/
Carter, H., Thompson, B. S., Bull, J. W., Dickman, A., Jones, J. P. G., Shrikanth, S. & zu Ermgassen, S. O. S. E. (2026). ‘Demystifying biodiversity finance’. Nature Reviews Biodiversity. https://doi.org/10.1038/s44358-026-00155-z