Can Biodiversity Funds Help Investors Protect Wildlife?

Featured Sponsor

Store	Link	Sample Product
UK Artful Impressions	Premiere Etsy Store

If you’re a climate-conscious investor, you probably already own a sustainable fund. Perhaps it focuses on renewable energy, or perhaps it looks to the circular economy or electric vehicles.

Investors have known about these issues for some time, of course, and the market for sustainable funds has exploded to the point where regulators are stepping in to sort out what’s green and what’s not.

But there’s a new hot topic in sustainability, often referred to as the other side of the climate change coin: biodiversity.

About a million species are threatened with extinction (we know of only 1.5 million, although there are likely millions more), many within decades, according to the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES). As of 2018, the species’ population sizes had decreased by an average of 69 percent since 1970, according to WWF’s Living Planet Index.

The main culprit is not climate change, even if it is big, but changes in the use of land and sea, especially deforestation. Pollution, including agricultural pesticides and ocean plastics, is another driver, while invasive alien species have contributed to nearly 40 percent of all animal extinctions since the 17th century, including native island birds. of Guam in the Pacific, which disappeared after the introduction of the brown tree snake.

A United Nations conference in December (confusingly dubbed COP15 but separate from the more well-known COP26 climate conference as it focused on biodiversity) agreed on some goals by 2030, including halving food waste, cutting government subsidies that encourage biodiversity loss and the expansion of protection for areas of biodiversity.

The fund management industry has taken notice. A wave of biodiversity funds has sprung up in the last year to supposedly address this problem. Morningstar, the data provider, has 19 such funds, many of which are less than a year old, yet without meaningful performance data.

But with the industry in its infancy, fund managers still haven’t agreed on how to measure biodiversity. One problem is that there is not much hard data on biodiversity that can be used to select stocks.

Alix Chosson, ESG analyst at Candriam, says a lack of regulation and agreement on the right metrics can make integrating biodiversity into corporate strategies difficult. “COP15 brought some general engagement and good intentions, but nowhere near what COP21 brought to climate,” she says. While climate change has carbon emissions as a measure, biodiversity is a broader issue and can include species, soil and water, to name a few.

Some analysts use a metric called “average species abundance,” or MSA, which attempts to measure what actual levels of biodiversity are as a result of a company’s activities versus what they should have been. Taken roughly, this approach could mean that funds only invest in industries that never had a big MSA impact in the first place: tech stocks, for example, or offices.

The Euronext ESG Eurozone Biodiversity Leaders PAB Index, for example, uses MSA as one of its tools to select companies for the index. The result: top 10 holdings dominated by technology and consumer stocks, including Michelin, Unilever, Pernod Ricard and luxury group Kering.

Tom Atkinson, who manages Axa’s Biodiversity fund, has an alternative way to use existing metrics: He says a bad MSA score can be an opportunity to engage with that company — engagement is an important tool for sustainable investors . For example, his team has engaged with a paper and packaging company that uses a lot of land and therefore has a lot of room for improvement.

In general, he says his fund tries to take a “purist” approach and doesn’t address climate change as such as he assumes investors already have that exposure in other funds. It focuses on four areas: water, agriculture, recycling and recirculation, and sustainable materials, and is aimed at solution providers rather than mega-caps making biodiversity promises.

To be included in the fund, a company must have at least 20 percent of its revenue coming from a product or service that specifically addresses biodiversity, leading to the exclusion of companies like Unilever, for example. This also gives the fund a bias towards mid-caps. The fund has agricultural company Deere, water company Xylem and Darling Ingredients among its major holdings.

Some biodiversity funds try to adopt a blended approach. Fidelity’s sustainable biodiversity fund — launched in September and still tiny at just $5 million — has 75 to 80 percent of its stakes in what manager Velislava Dimitrova calls solutions. These include Bioceres, which focuses on crop productivity and helps the agricultural industry become carbon neutral, Corteva, which offers farmers better pest control solutions for biodiversity, and Bakkafrost, which farms low-carbon salmon.

The rest of its holdings are in so-called “best in class” companies, those that are doing better at tackling biodiversity than their peers, even if they aren’t in the business of providing specific solutions. Danone and L’Oréal make their way into the top 10 companies based on the fact that they are committed to improving their biodiversity footprint. Having best-in-class companies is also a way for biodiversity funds to spread their risk: companies that are proposing positive solutions are likely to be smaller and riskier than larger-cap defensive stocks.

Other funds feel comfortable taking a longer-term view at the expense of significant short-term pain. Edward Lees, co-manager of the BNP Paribas Ecosystem Restoration fund, is critical of funds that focus on the best companies in the sector. “We cannot afford to look only at these indirect stories. We have to get moving », he says. His fund has various stakes in the food and agriculture sector, from Darling Ingredients to Oatly to Salmon Evolution.

But directed attention can come at a price when the global economy is in trouble. With biodiversity solutions still in a relatively early stage, companies focused on this area tend to be mid-cap at best and aiming for growth, rather than delivering steady dividends. Last year, with interest rates and inflation rising, was difficult for them. The case for them is clearly long-term, with regulation and investor interest likely to increase, while fund managers say the downgrade makes this a good time to buy.

The BNP Paribas fund, for example, has lost almost 40% in the last year. Lees says that while they remain committed to integrity, they are shifting the market cap curve slightly in light of current economic conditions.

With Monday’s World Biodiversity Day set to raise awareness, it’s a good time for retail investors to consider putting these funds in their portfolio alongside their existing climate change holdings. And professional investors need to push companies to disclose more about their impact on biodiversity so they can develop better metrics.

With an uncertain economic outlook, investors may see recent valuation losses linger for a while as mid-caps at the forefront of change can be volatile. So these titles will not suit everyone. But, in the long run, the sector is likely to grow.

Alice Ross is a contributor to FT. Her book, “Investing to Save the Planet,” is published by Penguin Business. Chirping: @aliceemross