Fund managers offering strategies that target biodiversity have expanded their asset base by 15% in two months, as the industry builds a new ESG market despite an absence of standardized data.
(Bloomberg) — Fund managers offering strategies that target biodiversity have expanded their asset base by 15% in two months, as the industry builds a new ESG market despite an absence of standardized data.
The growth follows a 150% surge in the number of funds offering such strategies last year, according to figures provided by Morningstar Direct.
That said, biodiversity remains tiny compared with the wider market for environmental, social and governance strategies, at just $2.9 billion in combined assets as of Feb. 28, the research firm estimates.
The biggest newcomer is a passively managed fund from Northern Trust Corp., according to Morningstar.
By far the majority of the funds are actively managed and domiciled in Europe, where early-stage regulations targeting biodiversity are most advanced. Axa Investment Managers and Lombard Odier Investment Managers were among the first to get a foothold in the market, and remain among the top three.
“The move in biodiversity that we have seen is 10 times the speed of what we have seen with carbon,” said Ingrid Kukuljan, head of impact and sustainable investing and international lead portfolio manager at Federated Hermes.
“And rightly so, because this is the biggest systemic threat that we face.”
Since a landmark agreement was struck at the COP15 summit in December, the finance industry has been forced to pay attention to biodiversity.
The Global Biodiversity Framework, signed by almost 200 nations, envisages a central role for banks, insurers and asset managers in reaching the stated goal of mobilizing at least $200 billion each year to protect the natural world.
A major hurdle for now, though, remains the lack of reliable biodiversity data.
Firms risk succumbing to “black box calculations,” said Wijnand Broer, program manager at the Partnership for Biodiversity Accounting Financials and partner at CREM, a Netherlands-based consultancy.
“You see more and more data providers entering the market providing biodiversity data, but it’s not always clear what the underlying assumptions are,” he said.
Those data risks are significantly greater than for climate portfolios, which benefit from established methodologies for measuring carbon emissions, Broer said.
PBAF has analyzed some of the data that’s now making its way onto the market and found that the different approaches providers are using “can lead to very different results,” he said.
For now, research shows that the finance industry’s focus on generating lucrative returns from investments can be hard to combine with the kind of support biodiversity needs.
A recent study by nonprofit ECGI that looked at 33 biodiversity finance deals closed by an anonymous investment manager between 2020 and 2022 found there’s often a “trade-off between financial returns and biodiversity impact.”
“Profitable projects can be viably financed by pure private capital, but tend to have lower biodiversity impact,” while “projects with higher biodiversity impact tend to be less profitable,” the authors, led by Caroline Flammer, professor of international and public affairs and climate at Columbia University, said in the report.
Private capital can be a “useful addition to the toolbox,” but is “unlikely to substitute for the implementation of effective public policies,” they said.
Nevertheless, the real-world risks associated with ignoring biodiversity loss are becoming increasingly apparent and financial professionals will soon have a better sense of what’s at stake, according to Roel Nozeman, PBAF’s program director and head of biodiversity at ASN Bank.
National implementation of the Global Biodiversity Framework, which also includes targets around monitoring and disclosures, “will bring a lot of things to the surface that aren’t being seen by the market,” Nozeman said.
“A lot of these risks will become apparent and that will hopefully change behavior,” he said.
Kukuljan, who manages a $45 million biodiversity fund at Federated Hermes, said asset managers can no longer afford to hold back.
“There has been an excuse of a lack of metrics,” she said.
“It’s a very complex subject,” but “there’s plenty of data available, you just need to contextualize it.”
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