Global assets in open-end funds and ETFs that focus on biodiversity, while still relatively small, have more than doubled in the last three years as investors increasingly view biodiversity loss as a risk factor, and an opportunity area to consider, according to Morningstar Sustainalytics’ latest report.
The Landscape of Biodiversity and Natural Capital Funds examined the range of biodiversity-themed funds on offer and the types of companies these funds invest in. It found that global assets held in biodiversity open-end funds and ETFs reached over $3.7bn, boosted by product development.
Morningstar Sustainalytics identified three distinct types of biodiversity investment strategies. Risk-oriented strategies seek to invest in companies that try to reduce their impact on biodiversity, while solutions-focused strategies invest in companies that provide solutions to biodiversity loss. Some mixed strategies, however, invest in both.
These three distinct strategy types play different roles in an investment portfolio, from reducing portfolio risks to investing in alpha-generating opportunities.
Commenting on the report, Hortense Bioy, head of sustainable investing research at Morningstar Sustainalytics, said: “It’s still early days for biodiversity investments. Strategies to execute on biodiversity objectives have proved difficult to develop, partly due to a lack of reported corporate data and standard metrics and because biodiversity is at the intersection of other more easily investible and better-known themes such as climate change, water and the environment.”
“Nevertheless, biodiversity is an emerging topic that investors can no longer ignore both as a risk factor and as an opportunity, particularly in the face of a changing climate and declining global habitat.”
Negative flows in 2024
All 34 funds identified by Morningstar Sustainalytics are domiciled in Europe, with over $800m invested in solutions-oriented funds. However, such funds are the only biodiversity-related strategies attracting net new money this year to date, at $50m.
The report observed a bias towards the industrial, technology and materials sectors, on average, while US and European firms dominated biodiversity fund holdings, with virtually no exposure to emerging markets. Firms in developed markets typically have lower ESG risks and more policies to address biodiversity loss, as well as having more resources to innovate and develop biodiversity-related solutions.
Meanwhile, the research found that, after four years of inflows, biodiversity funds experienced negative flows in the first nine months of 2024, on the backdrop of reduced appetite for ESG funds. Such funds have lagged behind ESG and non-ESG peers, on average, since 2021, partly due to their higher fees. 2022 was the only year of outperformance.
Additionally, 70% of companies in relevant subindustries were found to lack a biodiversity protection policy. Multi-utilities lead, with 59% of companies having such a policy, followed by precious metals mining at 56% and gold at 50%. The laggards are oil and gas storage and transportation (6.5%) and facilities maintenance (6.3%).
