IOB is a partner in the EU funded BIOFIN project, which seeks to develop mechanisms to standardise information related to nature-based solutions to enable potential investors and other financial actors to easily and accurately assess the value and potential returns on investments in nature-based solutions. The goal is to create a dashboard to make information related to nature-based solutions easily understandable and verifiable to financial actors, to encourage a greater flow of mainstream finance into nature-based solutions.
The research paper “Valuation of nature-based solutions: Methods, challenges and critical considerations” by Fredrik Carlsson, Mitesh Kataria, Elina Lampi from a project consortium member, The Department of Economics in the University of Gothenburg, explores the importance of valuing nature-based solutions and introduces some of the concepts and the complexity involved in the area and in developing the solution.
Nature-based solutions (NbS) are strategies that use ecosystems to address societal challenges, such as biodiversity loss, climate change, and urban resilience. Examples range from urban green spaces and green roofs to large-scale forest conservation and wetland restoration. NbS provide a variety of ecosystem services—benefits that humans derive from nature—including food, medicine, recreation, climate regulation, and cultural identity.
Effective policies to protect and restore biodiversity depend on understanding the social and economic values associated with these losses and gains. However, many ecosystem services and biodiversity benefits are not traded in markets, making their economic valuation challenging but essential for informed policy and investment decisions.
The paper adopts an anthropocentric (human-centered) perspective, focusing on the value humans derive from biodiversity and ecosystems. Four main types of values are identified:
Direct Use Values: Tangible outputs consumed directly, such as food, wood, and recreational opportunities.
Indirect Use Values: Benefits that support human well-being without direct consumption, such as climate regulation, pollution reduction, and protection from natural disasters. These are typically non-market values (i.e. not bought or sold in markets).
Non-Use Values: Values derived from the mere existence of ecosystems or species, regardless of direct use. This includes existence value (knowing an ecosystem is protected), bequest value (preserving nature for future generations), altruistic value (benefiting others), and “warm-glow” value (moral satisfaction from supporting conservation).
Option Values: The value of preserving the possibility of future use, especially when future benefits are uncertain or unknown. This is particularly relevant for maintaining genetic diversity and ecosystem resilience.
Many indirect and non-use values are not reflected in market transactions, necessitating specialised economic valuation methods.
Using the “Willingness to Pay” (WTP) measure of economic value, the research paper reviews three main economic approaches for measuring the value of NbS and biodiversity:
1. Revealed Preference (RP) Methods
RP methods infer values from observed behaviour in related markets. Two common RP techniques are:
Travel Cost Method (TCM): measures WTP for goods such as national parks and other recreational areas. Individuals spend money and time to visit parks, and these expenditures can be seen as the price they pay for visiting the park
Hedonic Pricing Method (HPM): Assesses how environmental attributes (e.g., air quality, proximity to parks) affect property prices. This bundles non-market environmental benefits with market transactions.
RP methods are limited to use values and cannot capture non-use values or value new goods and future improvements. RP methods therefore require functioning markets and may be affected by factors like imperfect information, market power, and model misspecification. RP methods are also limited in identifying the value of specific characteristics of an NbS. For example, a travel cost study of a single nature reserve captures the total recreational value, but not which characteristics of the nature reserve determine this value. To estimate this, we would need a more advanced travel cost study where people choose between a set of nature reserves, and a variation of the characteristics of the nature reserves that allows us to identify the relevance of individual characteristics of the nature reserve, e.g., the level of biodiversity.
2. Stated Preference (SP) Methods
SP methods use surveys to elicit hypothetical willingness to pay (WTP) )or willingness to accept (WTA) compensation) for changes in environmental quality. The two main SP techniques are:
Contingent Valuation (CV): Respondents state their maximum WTP for a defined scenario (e.g., improving biodiversity).
Choice Experiments (CE): Respondents choose between alternatives with varying attributes, allowing estimation of WTP for specific features.
SP methods are the only way to capture non-use values, making them crucial for biodiversity valuation. However, they are subject to hypothetical bias (respondents may overstate WTP in surveys) and scope insensitivity (WTP may not scale with the magnitude of change - for example, if only citizens from one country are surveyed, values from people in other regions are excluded, even if they benefit from the NbS). Furthermore, the choice of survey population affects whose values are measured. Local surveys may miss broader, even global, non-use values.
3. Production Function Method (PFM)
PFM models the contribution of environmental quality (as an input) to the production of market goods (e.g., how wetland restoration affects agricultural yields). It requires detailed knowledge of input-output and deep understanding of ecological relationships and risks double-counting values if intermediate and final ecosystem services are aggregated.
The authors conducted a literature review of 42 European studies on NbS valuation. Key findings include:
Over 80% of studies used SP methods (CV or CE), reflecting their ability to capture non-use values.
Only 5% used HPM or PFM.
Most studies focused on recreational values (71%) and direct use values, often surveying local citizens or visitors.
Non-use values are significant; in some cases, they account for 25–45% of the total value of ecosystem services.
A barrier to recognizing NbS for biodiversity loss is limited evidence of its effectiveness and economic value. The complexity, various sources of values, and scale across space and time of NbS mean many challenges. To acknowledge the complexity of biodiversity and ecosystems is important not only for assessing the values of NbS but also when communicating about its role and what values it provides. This can be important both for policy support but also for funding. If investors do not understand the role of NbS, and what values it provides, they will make other choices. NbS can often be a substitute to grey infrastructure with engineering-based solutions, e.g. coastal wetlands can be an alternative to concrete sea defence walls.
It’s therefore important to investigate how NbS compares to “engineering solutions” and man-made structures. Moreover, NbS provides many non-use values like cultural, spiritual, and existence values. Although direct-use values are often of primary concern, there is a clear risk of disregarding both indirect-use values and non-use values.
Finally, given the complexities of the ecosystem, the risks of catastrophic and unexpected outcomes with consequences for the whole economy are important. The valuation literature rarely focuses on the broader picture, despite non-negligible risks of catastrophic outcomes for ecosystems and humans. A narrow focus on individual studies of specific NbS or ecosystem services, as observed in much of the reviewed literature, entails a significant risk of overlooking broader systemic outcomes and thereby undervaluing NBS.
Valuing nature-based solutions is complex but essential for informed decision-making to support biodiversity restoration and enhancement. While economic methods exist to estimate both market and non-market values, each has strengths and limitations. A more integrated and comprehensive approach is needed to fully realize the potential of NbS in addressing biodiversity loss and other societal challenges.
BIOFIN is funded by the European Union. Views and opinions expressed are however those of the author(s) only and do not necessarily reflect those of the European Union or the European Research Executive Agency (REA). Neither the European Union nor the granting authority can be held responsible for them."
Read the full research paper: Valuation of nature-based solutions: Methods, challenges and critical considerations