After COP16, questions remain about the role of policies and investments in driving change.
The latest UN Biodiversity Summit, or COP16, held in Colombia in October, was a mixed event. While 119 nations signed binding biodiversity targets, the conference ended with a bitter dispute between rich and developing countries over who should pay for damaged ecosystems.
What is not disputed is the urgent need to avoid species extinction and further environmental destruction.
As this awareness grows, the preservation of biodiversity has become a theme in which it is possible to invest. Global assets held in open-ended funds and biodiversity ETFs have more than doubled over the past three years to around $3.7 billion.
However, according to data from Morningstar Sustainalytics, despite its rapid growth, the size of the biodiversity fund universe is tiny compared to the $520 billion climate fund market.
“Biodiversity intersects with other themes and climate change. But climate change steals the show when it comes to priority. We can therefore hope that COP16 will serve as a catalyst to accelerate the disclosure and integration of biodiversity,” explains Hortense Bioy, head of sustainable investment research at Morningstar.
In a report released last month, Morningstar divided biodiversity funds into three categories, namely risk-focused funds, blended funds and solutions-focused funds.
“Risk-focused funds generally only invest in companies that aim to reduce their negative impact on biodiversity. “Risk-oriented funds also generally exclude companies involved in activities that harm ecosystems,” she says.
“Solutions-focused funds, on the other hand, target companies that contribute to the protection and restoration of biodiversity through their products or services.
The Robeco Biodiversity Equities Fund, with a Morningstar Medalist Rating of Silver, is the highest Morningstar Rating biodiversity fund available in Europe.
The fund’s largest holding is French company Veolia Environnement SA VIE, the world’s largest water utility, with 5.05%.
According to Morningstar data, the fund has seen inflows of more than €1.9 million (£1.58 million) since the start of the year and is up 7%, surpassing the Morningstar Ecology category.
The BNP Paribas Easy ESG Eurozone Biodiversity Leaders PAB fund has a Bronze rating.
The fund’s largest holding is German software giant SAP, which represents 10.7% of the portfolio.
The fund has gained 12.37% since the start of the year and, over the same period, it recorded capital outflows of €29 million.
Obstacles to biodiversity funds
For Morningstar’s Mr. Bioy, two obstacles prevent biodiversity from accessing the capital it needs: a lack of data and a lack of interest from the United States.
“What we are seeing on the investment opportunity side is that there is very little progress in this area. One of the challenges is the lack of availability of data, the fact that there are no standards and no single set of indicators that investors can turn to. And all this is happening in Europe,” she explains.
However, she believes the key to boosting investor engagement is through legislative change. The impetus for preserving biodiversity cannot come only from the financial services sector, but from policy developed by public authorities.
Diverging interests between companies that want to accelerate the ecological transition and those that want to slow it down have also hampered governments, stagnating the progress the world needs to make.
Did COP 16 make a difference?
However, Lindsey Stewart, director of research and policy stewardship for Morningstar Sustainalytics, was skeptical about the impact of COP16.
“A lot [aurait dû] depend on the type of framework on which countries [se seraient mis d’accord], [pour] determine how investors and countries will begin to think about the issue,” he says.
However, the conference ended on a negative note after rich countries blocked a proposal to create a fund that would help poor countries restore their damaged natural environments.
The move angered countries in Africa and Latin America, many of which refused to continue negotiations on other pressing issues.
Additionally, the event welcomed a record number of business representatives and lobbyists from various business sectors. A total of 1,261 industry delegates traveled to Colombia for the conference, more than double the 613 delegates who will attend the 2022 UN Biodiversity Conference.
The conference did, however, yield some victories, including an agreement that recognizes the key role that indigenous peoples and people of African descent play in conserving biodiversity.
Yet for Stewart, the question of materiality, that is, how companies report and track the costs of the natural resources on which they depend, remains an elusive question that needs to be addressed.
“Around the world, natural capital is treated as if it were free. You may have to pay someone to access their property rights. But if you find a natural resource, you usually don’t have to consider its cost to nature. It is therefore very difficult to establish a financial materiality file for a resource that has been accessible for free for centuries.
In relation to climate change, there are infrastructures such as the Financial Stability Board, an organization of global central banks, which examines the main economic and macroeconomic impacts of climate change on the global economy.
Mr Stewart admits that the regulatory response to the climate problem has been slow, but that there has been a political momentum behind the movement, a momentum that biodiversity, as a theme despite COP 16, has not yet seen.
Yet with all the noise around COP16, Gayaneh Shahbazian, head of biodiversity engagement at Morningstar Sustainalytics, wants people to recognize that the main problem is the continued destruction of our ecosystem.
“Over the past 50 years, wildlife populations have fallen by more than 70%. This dramatic decline is not only a tragedy, it is also a stark warning,” she says.
The continued destruction of biodiversity could lead to the complete destruction of essential services on which humans depend to live, from access to drinking water to climate regulation.
“These services have been treated as externalities and neglected in political and economic decisions, despite supporting everything from global food production to business resilience in the face of climate change. The consequences of nature degradation beyond these tipping points will be catastrophic for both society and the economy,” she adds.
Biodiversity Fund Trends
“The general trend for biodiversity solutions funds remains positive,” concludes Mr. Bioy.
“Investor surveys show that there is still an appetite for investments that seek positive environmental outcomes and have the potential to generate alpha at the same time.
“Companies that offer products and services that contribute positively to the protection and restoration of natural ecosystems will benefit from the growing need to address the biodiversity crisis in the years to come.
At the same time, she says progress in taking biodiversity risk into account in investment decisions remains slow, although it is among the top three risks facing investors over the next decade. (World Economic Forum Report).
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