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Fund Managers Eye Investments That Will Slow Decline of Biodiversity

It’s no secret that investors are putting more money into companies that adhere to responsible environmental, social and corporate governance (ESG) guidelines. A study conducted by Deloitte found that the percentage of investors who applied ESG principles to at least one-quarter of their portfolios climbed to 75 percent in 2019, from less than half just two years earlier. To meet the demand for ESG investments, a growing number of mutual funds are applying ESG principles to their own holdings – with some putting an emphasis on biodiversity.

Rising investor interest in biodiversity is mostly the result of rising awareness about what’s at stake. As noted in a recent Bloomberg article, the world’s wildlife populations have declined by an estimated two-thirds in the past 50 years, and up to 1 million species are thought to face extinction. The earth’s ecosystems have been severely damaged by everything from deforestation and pollution, to mining and overharvesting.

The environmental impact of these activities has been well documented. But until recently, less attention has been paid to the financial impact. That’s changing as more people understand what’s at stake. The World Economic Forum notes that more than half of the world’s total gross domestic product, some $44 trillion, involves actions that are “moderately or highly dependent” on nature.

About half of the world’s drugs are developed from natural products – including anywhere from 50,000 to 70,000 plant species. Meanwhile, the production of food relies heavily on healthy soils and pollination and faces several risks amid a decline in the world’s biodiversity.

What steps are financial firms taking to deal with the crisis? For now, most work is focused on simply analyzing the financial risks related to a decline in biodiversity. These risks include lower potential returns, less availability of capital, and increasing insurance liabilities tied to wildfires, extreme weather, and other environmental catastrophes.

In June, Holland’s central bank – De Nederlandsche Bank NV – issued a report saying that the country’s financial institutions held 510 billion euros (about $604 billion) of investments that were highly dependent on ecosystem services such as food and water. The loss of these services would “lead to substantial disruption of business processes and financial losses,” the bank said.

While there’s still not a ton of mutual fund money pouring into biodiversity investments, some funds are beginning to make moves in that direction. The UN-affiliated Principles for Responsible Investment (PRI), the world’s leading proponent of responsible investment, noted in a September report that there is “a small but growing number of funds and bonds with specific biodiversity objectives.”

The report also detailed a rise in “investor engagements with a specific focus on avoiding and minimizing biodiversity impacts,” along with “several investor engagements that focus on companies whose activities are known to impact biodiversity (such as through deforestation).”

Much of the action is taking place in Europe. Among the funds moving money into biodiversity is London-based Axa Investment Managers, which last year launched a 200 million-euro impact fund to invest in projects that protect natural habitats. In September, London’s HSBC Global Asset Management announced a partnership with a sustainability advisory firm to create a new fund manager. Dutch asset management firm Robeco, along with a small number of other fund managers, has also prioritized biodiversity in meetings with companies.

Meanwhile, a group of 26 asset managers, insurers, and banks recently created the Finance for Biodiversity Pledge, which aims to “protect and restore biodiversity” through their finance activities and investments. That announcement came a couple of months after several finance firms – including Axa, BNP Paribas SA, and Standard Chartered Plc – joined with the World Wide Fund for Nature (WWF), the United Nations, and various European government bodies to start work on a task force on nature-related financial disclosure. Their goal is to create a framework to guide nature-related financial disclosure by the end of 2022.

Moving forward, the PRI says there are numerous steps mutual funds and other asset managers can do to have a positive impact on biodiversity. These include:

  • Allocating capital to sectors or business models that avoid and reduce biodiversity loss, and increasing opportunities for positive outcomes on the ground, including restoration
  • Engaging investees on reducing negative biodiversity outcomes and designing stewardship approaches to deliver positive biodiversity outcomes
  • Engaging policymakers on reforming incentives to activities that don’t drive biodiversity loss.

The stakes are high but also attainable. As the PRI report said: “It is essential that investors play a role in meeting the goals of the post-2020 global biodiversity framework to prevent further degradation and to contribute to positive biodiversity outcomes.”

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