Banks are keen to invest more in biodiversity but experience difficulties in finding suitable products. The concept of biodiversity is stretched and providers do not make sufficiently clear what goals they are pursuing and how these are measured.
Sustainability regulations require asset managers and banks to take into account a number of factors on which they must also report. A large part of it deals with biodiversity, giving the topic great attention from banks and asset managers as well as from providers.
“Biodiversity is a hot topic because it is now also reflected in the PAI indicators,” said Rabobank head of funds and sustainability Rishma Moennasing. “We are seeing a lot of fund launches in that area partly because of that.”
Rabobank, as well as ABN Amro, would like to invest in biodiversity, but in a product that actually contributes. They want to see conservation and growth of biodiversity, rather than investing in companies that are doing “not as bad”. In their experience, however, the vast majority of biodiversity funds on offer are of that “less harmful” variety.
Not yet
There are some funds that could be suitable, says ABN Amro senior fund adviser Peter Pauw, but their investment universe is very small and often less liquid. “We think this means they have to put too much effort into putting away larger amounts of investors’ money. That’s why we don’t invest in them, or not yet.”
Other funds are not strict enough for ABN Amro’s taste, according to Pauw. “As far as we are concerned, the concept of biodiversity is sometimes stretched too much.” Rabobank’s Moennasing recently had several providers on the floor: “I came across a product in which the largest investment is a fashion company, while the fashion industry is one of the most polluting segments. How are you going to explain to the client that you have a fashion company as the biggest investment, while you are pursuing biodiversity?”
Even funds that do commit to growing biodiversity can generate discussion within the bank. Pauw: “As with sustainable investing in a broad sense, investing in biodiversity has multiple sides. For example, if a fund invests in a company that invests in fish farms, is that actually good for biodiversity?”
Developing market
Pauw believes the industry needs time. “Right now, the business models of biodiversity companies are still difficult. The market is only just developing. Who will earn from clean air? Ultimately all of us, but who is going to pay for it?” He makes the comparison with emission rights, the price of which has soared in recent years.
In the Privium Sustainable Impact Fund, an FGR fund on the shelf at ABN Amro, there is, for example, a forestry fund that creates forests in English areas that would otherwise not be used.
“With that kind of replanting, you can increase biodiversity. Meanwhile, they capture CO2, which allows them to sell emission rights,” Pauw said. “So in the end, they can make money from biodiversity. If the government decides to put more money into healthy forests or give farmers money if they promote biodiversity, then there will be a revenue model.”
Moennasing also believes the industry still has “a lot to develop”. For instance, around the impact goals that the funds aim for, as she thinks these are insufficiently concrete at the moment. For now, Rabobank is therefore focusing on biodiversity as an engagement topic.
“With the companies we invest in, we have conversations about how they deal with biodiversity and how they could improve. That fits this theme better than investing in it directly,” she said.
‘Sham liquidity’
Another option is to invest in products that invest directly in biodiversity projects. Although here the Article 9 classification is often justified, there is another problem.
“They are often illiquid investments, with a high cash position to provide some kind of sham liquidity,” said Moenassing. “And don’t forget the double costs. You pay ánd the manager - the provider - but such a provider can invest in other managers again and there are fees charged there too. So the question is, what return do you have left after costs? And to measure the impact results achieved, the quality and availability of the underlying data of these kinds of investments must improve.”
Twenty funds
According to Morningstar Direct data there are currently 20 mutual funds that carry biodiversity in their title. Four of these are ETFs, while the rest are open-ended mutual funds.
The largest funds are the €1.1bn Northern Trust World Natural Capital PAB Index Fund II, the €680m Lombard Odier Funds - Natural Capital and the €350m AXA IM ACT Biodiversity Equity UCITS ETF. The other funds have sizes of approximately €100 million.
All but the Pléiade and Karner Blue funds were launched in 2020, 2021 or 2022. RobecoSam launched RobecoSAM Biodiversity Equities at the end of October last year, while France’s Crédit Mutuel Arkéa launched AIS Biodiversity First P at the end of December 2022.
This article originally appeared in Dutch on InvestmentOfficer.nl