Ecosystem services are essential for life on Earth and ensuring their continued provision
requires the protection and restoration of biodiversity. But the scale of financing needed
to protect biodiversity far exceeds the capacity of the public sector making it necessary to
attract private capital. Biodiversity-linked bonds, derived from ESG sustainability-linked
bonds, could help channel the required capital to biodiversity conservation as their flexible
payoff structures can accommodate the preferences of both issuers and investors. This
paper proposes an option-pricing based valuation framework that addresses two key
characteristics of biodiversity-linked bonds: first, the optionality embedded in the bond’s
payoff structure, and second, the constraints on the family of stochastic processes
suitable for modeling complex biodiversity dynamics. A standardized pricing framework
could support scaling up biodiversity markets and help to narrow the existing funding gap.