Biodiversity-Focused Products Poised for Growth from Investors and Managers

In September, the Taskforce on Nature-related Financial Disclosures is slated to release the final version of their framework for biodiversity standards – a set of standards that will allow companies and investors to better measure and report the impact of their operations, and investments, on nature and biodiversity.

The much-anticipated standards arrive as asset owners and asset managers are slowly growing their interest in investments that help protect or restore biodiversity – or at least minimize their impact on nature. The new standards should make it easier for asset managers to build new products, and attract further assets for programs, companies and projects that have a biodiversity tilt.

“There are more and more managers coming to market with products,” says Sarita Gosrani, director of ESG and responsible investment at bfinance. Once the framework is released, “That will provide much-needed guidance for asset managers on how to factor biodiversity into their products,” she adds.

“That’s going to drive a lot of change.”

Asset owner interest in biodiversity investments has been slowly building in recent years, and asset managers have been slowly building products and launching funds to meet that demand. Industry observers are optimistic that both supply and demand will continue to grow.

Among the current product offerings is the Land Degradation Neutrality Fund, which Natixis Investment Managers affiliate Mirova launched in 2017. It reached final close in 2021 with more than $200 million in commitments, and invests in profit-generating sustainable land use and land restoration projects in developing countries. Those include projects around sustainable coffee and cocoa production, the restoration of deforested areas, and sustainable forestry.

“We see growing appetite” for such investments, says Mirova managing director Gautier Queru, who manages the fund. He adds that the vehicle saw “significant investment tickets from insurance companies, pension funds and others. And going forward they want to do more.”

A more recent entry is the £1.4 billion Global Environmental Solutions Fund, part of a suite of products formed earlier this year via a partnership between Scottish Widows and Schroders. The fund will target companies that work to “resolve nature and climate issues,” an announcement said, with a focus on those working in sectors like biodiversity preservation, sustainable transport and clean energy. The fund will only invest in companies that generate at least 50% of their revenue from such efforts.

The strategy seeks to “help tackle biodiversity loss through investment in, and engagement with, companies that provide products and solutions that address this issue, or do so through their own company policy,” the Scottish Widows announcement added.

Investors can also find biodiversity-focused strategies from firms like Lombard Odier and Climate Asset Management, a joint venture between HSBC Asset Management and Pollination.

The latter venture, announced in 2020, aimed to create private funds that “offer investors a wide exposure to global natural capital themes in both emerging and developed markets,” a fund creation announcement said. Climate Asset Management now offers a Natural Capital Strategy and a Nature Based Carbon Strategy, according to its website.

So far at least, the product offerings have learned toward the private equity side. “There’s definitely more growth on the private side,” Gosrani says.

Private equity funds “allow investors to access thematics like the circular economy, water, aquaculture, sustainable agriculture, and similar areas that are developing solutions to address biodiversity loss and impact,” she says.

Funds that invest in public companies tend to have a broader focus.

“On the public side, there are a number of strategies that at least cite biodiversity as one of their thematics, though it’s difficult to purely target biodiversity,” Gosrani says. “But there are products that talk about biodiversity as well as the circular economy, water management, precision agriculture and so forth.”

A fund or strategy doesn’t have to say “biodiversity” in its name to have at least a partial biodiversity focus. “An environmental impact type fund, whether it’s public or private, will naturally have components that target biodiversity,” she says. For instance, a small- to mid-cap focused fund will include “companies that are providing solutions” to challenges around water, agriculture and the like.

It’s also important, Gosrani adds, to keep in mind the potential risks to returns when underlying companies are exposed to biodiversity loss. That can be particularly noteworthy in sectors like agriculture, food and beverage, and construction, she notes.

Interest starting to boom

The growth of these funds shows that investor interest in biodiversity is “starting to boom,” says Maria Nazarova-Doyle, Scottish Widows’ head of responsible investments and stewardship. That interest also got a boost from the UN Biodiversity Conference in Montreal late last year.

“But this interest is still nascent,” she adds. “In conversation with other organizations, we often hear the theme referenced heavily, but in terms of policies and products, these are still often confined to areas like deforestation and water.”

Queru says he was “pleasantly surprised” to see a heavy turnout at that COP 15 meeting, including a wide range of asset owners and asset managers. “So I think the awareness is there and growing.”

It’s not just pensions and insurers that are interested in biodiversity; many corporates are as well. A good example is the cosmetics firm L’Oreal, which in 2020 launched a €50 million fund dedicated to biodiversity, hiring Mirova to manage it. The projects it has backed include restoration of primary Brazilian rainforest and mangrove restoration in Asia, Queru says.

Beyond the obvious benefits for nature, such funds allow Mirova to “test the market,” he adds. “It’s a way to test new models [of investment]” – to find the best projects to invest in and the best way to invest in them. Mirova takes those lessons and applies them as it develops additional funds and strategies, Queru says.

There could be a lot of product development from numerous managers in the coming months. “My sense is that we’re on the cusp of witnessing a wave of biodiversity-specific funds once TNFD reporting becomes mainstream, as there’s a clear appetite for such funds,” says Nazarova-Doyle. “There’s also no doubt that broader sustainability-focused funds will be looking to include more nature-related themes in parallel with this.”

Plenty of challenges

Of course, any manager looking to incorporate biodiversity into a fund or strategy will have to clear numerous hurdles. A key one is that it can be difficult to get basic data and information on how biodiverse a certain area is, and to know how a project or investment is impacting that biodiversity.

“Nature-related impacts are notoriously hard to gauge due to a lack of standardized metrics,” Nazarova-Doyle says. “When it comes to evaluating which companies to invest in, we’ve had to develop other metrics to track them against – for example, how much revenue is derived from sustainable activity, or how much capital expenditure is directed towards adapting its business towards core nature themes.”

There’s also a “lack of consistent data relating to nature impacts disclosed by companies,” she adds. “we’re confident that mandating TNFD reporting will help resolve this.”

Still, when it comes to biodiversity, data “is always going to be an issue. I don’t think we’ll ever have perfect data,” Gosrani says. “So we shouldn’t let that be a barrier.”

There is another challenge to biodiversity investing that’s even more fundamental. “This is a nascent asset class; the market is not fully mature,” Queru says. For everyone from investors to due diligence professionals to fundraisers, “There’s a lot more work required compared to more mature sectors, because it’s not all fully tested and efficient,” he says.

“It can be hard work to convince investors to deploy their capital here,” he adds. “But it’s also super interesting and a great experience, and we’re seeing every year, every quarter, more managers and more investors coming in.”

Nazarova-Doyle is similarly optimistic. “We’re on the cusp of a fundamental shift in sustainable finance, where nature will emerge as a prevalent theme in green investment,” she says.

Still to come is larger managers making a serious move into the biodiversity space – names like BlackRock, JP Morgan, Goldman Sachs. That should happen eventually, experts say, but the market isn’t ready for that just yet.

“I think we need more depth in the market, more liquidity and it’s probably not fully there,” Queru says. “But this is coming, definitely. It’s the direction we’re heading.”


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