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On the Money

Nature: Wall Street’s newest market

Asset managers are betting biodiversity funds will attract investor capital in the coming decade.

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Image via Shutterstock/LedyX

I clearly remember a lecture I heard four years ago where a professor stated that despite all the attention climate change receives, it isn’t the most urgent issue we face in terms of planetary sustainability. To illustrate his point, he displayed the oft-cited planetary boundaries chart, which defines the parameters "within which humanity can continue to develop and thrive for generations to come." 

Planetary boundaries chart

The planetary boundaries framework. Source: Licensed under CC BY-NC-ND 3.0. (Credit: J. Lokrantz/Azote based on Steffen et al. 2015.)

I am not a scientist, but even I could still tell that if the orange lines represent the level of concern we should have, then we should be much more worried about biodiversity loss than is currently the case. 

Then I thought there must be some context I was missing — something people in positions of power must know — that explained why businesses and politicians weren’t giving biosphere integrity or biodiversity loss the same level of attention they were devoting to climate change. They must have already addressed it. Right? 

Not quite, but last year represented a turning point for how the investment community views biodiversity. Asset managers launched nine new biodiversity funds in 2022, adding to the seven existing ones. 

Fidelity Funds’ sustainable biodiversity fund, for example, was launched in September with the aim to invest in companies that enable the stabilization or mitigation of biodiversity loss through their technologies and solutions. To date, it has only attracted $5 million of assets under management. Axa’s ACT biodiversity fund launched in April 2022; it has over $144 million under management, invested in companies that reduce or limit the negative impact of human’s activities on biodiversity. 

While these funds and other other new ones have boosted the total assets under management for biodiversity-focused funds triple, they cumulatively held less than $1 billion in assets at the end of 2022. For perspective, BlackRock raised $4.5 billion for a single climate-focused infrastructure fund last year, and the firm’s BFG Circular Economy fund has more than $1.8 billion of assets under management. 

Why now? 

The growing interest in biodiversity isn’t a coincidence. At the UN Biodiversity Conference (COP 15) that took place in Montreal in December, corporations, governments and NGOs came together to agree on a set of goals for nature over the next decade. One major outcome was an agreement to protect 30 percent of Earth by 2030. 

There are many benefits to getting the private sector on board with efforts to protect biodiversity. For one thing, private entities can often move faster than public sector counterparts and pivot more quickly as new information supports better decision-making. Consider the beginning of the COVID-19 pandemic, when tech companies began canceling in-person events and ordering employees to work from home while politicians continued to debate the need for shutdowns and safety measures.

Private sector financing also provides access to additional capital for biodiversity-related investments and can have faster feedback loops such as quarterly reporting and regular redemption periods that offer investors the opportunity to pull their money out of an investment fund. This drives accountability in capital allocation.

What’s more, the depth and speed of private capital markets is critical to efforts to protect Earth’s biodiversity, as trillions of dollars will be needed over the next decade. 

Fortunately, there is precedent for mobilizing private capital markets to address sustainability challenges. Investors have been asking corporations to report on  their greenhouse gas (GHG) emissions for decades — now, 71 percent of S&P 500 companies disclose them. An entire "carbon accounting" industry has developed around helping corporations, governments and other organizations measure and report carbon/GHG emissions — with the carbon accounting software market valued at $15.3 billion for 2023. 

Investors love data, so that’s what’s next for biodiversity. Frameworks and methods for collecting, analyzing, reporting and comparing corporate impacts on biodiversity are being developed and published. Everyone’s attention is on the Taskforce for Nature-related Financial Disclosures, which is supposed to release final recommendations for reporting in September. The framework will lay out how corporations can report and act on nature-related risks. 

Financial institutions are preparing for the avalanche of biodiversity data that will soon be incorporated into their investment analysis. Data providers such as S&P Global Sustainable1 and Nature Alpha are launching new products to help investors track biodiversity-related risks in their portfolios. New tools for monitoring the impact of corporations on biodiversity are definitely needed: A report published last month by Share Action found the majority of asset managers lack engagement and proxy voting policies related to biodiversity. 

It is certainly a good thing to see the private sector starting to recognize the need to act to prevent a biodiversity loss crisis, but doing so will require a lot more than a handful of biodiversity themed investments funds collectively managing $1 billion. We need the global economy to value biodiversity as if its life depends on it.

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