The loss of rare and threatened species may in cases be a significant issue arising from dam construction. This can be caused by the loss or changes to habitat during construction disturbance, or from reservoir creation, altered downstream flow patterns, or the mixing of aquatic faunas in inter-basin water transfers.  Threatened species issues can relate to terrestrial and aquatic species. 

Reservoir impoundment can flood extensive natural habitats, and can particularly impact on the extent of riverine forests and riparian ecosystems.  Direct drowning of faunal species can occur during reservoir filling, and animal rescue programs show mixed results as species cannot necessarily assimilate into the new environments to which they are moved.  Indirect impacts on species abundance and habitat quality can occur around schemes and in the catchment due to greater access, roads, human impacts, cutting of migratory corridors and habitat fragmentation.

Native aquatic species may not adapt to reservoir conditions or to the altered flow and water quality regimes in the affected river systems.  More uniform flow releases out of hydro schemes, unseasonal temperature regimes, and channel sediment disturbance can favour introduced species and disadvantage native species.  Benthic organisms can be most affected due to their limited mobility.  Species transfers can arise with interbasin transfers of water for hydropower generation, creating genetic mixing but also shifts in ecosystem balance due to competition for food supplies and available habitat.