Biodiversity-labelled funds now top US$3.9bil in total assets, up roughly 45% over the past 12 months, according to data from Morningstar Direct. — Reuters
New York: Funds tracking companies with purportedly strong biodiversity credentials are outpacing other climate-related investments this year, adding to expectations that such products are poised for major inflows.
Biodiversity-labelled funds now top US$3.9bil in total assets, up roughly 45% over the past 12 months, according to data from Morningstar Direct.
Those funds averaged returns of about 11% this year, Bloomberg data show. That compares with declines for benchmarks related to renewable energy, carbon and electric vehicles, with the latter plunging 21%.
Firms providing solutions to halt and reverse nature loss or taking steps to rein-in their own impacts are seeing a flurry of investments following a deal struck in December 2022 at COP15 that has compelled the finance industry to prioritise natural resources once considered cost-free.
With countries racing to develop strategies for protecting natural habitats and wildlife ahead of the United Nations biodiversity conference, or COP16, next month, investor demand is likely to accelerate.
“We see a big structural change happening in the biodiversity space,” Anna Vaananen, co-manager of the almost US$230mil AXA WF ACT Biodiversity fund, said in an interview.
The fund, registered under the European Union’s (EU) strictest sustainability category, so-called Article 9, invests in firms whose products can be scaled and used in sectors such as food and infrastructure to reduce biodiversity footprints.
“We are talking about decades-long transitions and these transitions offer great growth opportunities.” Vaananen said.
Data shared by Morningstar Direct show that the number of exchange-traded funds and open-ended funds in the biodiversity segment has risen to 30, up from 21 in September 2023 in spite of a lack of reliable data and scepticism over their composition.
Many portfolios include companies involved in waste management, clean-water supply and engineering services.
For instance, waste disposal firm Republic Services Inc and water pump maker Xylem Inc, which have gained almost 23% and 17%, respectively, this year, are among the top picks, according to a Bloomberg analysis of fund holdings.
Several funds also invest in chipmakers, insurers and even timber companies. The Northern Trust World Natural Capital index fund, which closely tracks the EU Paris-aligned benchmark, mostly has big tech including Nvidia Corp among its top holdings while Apple Inc has the largest weighting in the S&P 500 Biodiversity Index.
For some funds, outperforming the market in the medium term is as important as achieving biodiversity impact.
Jonathan Toub, co-manager of Aviva Investors Natural Capital Transition Global Equity fund, said his portfolio includes both smaller solution-providing firms and large-cap transition companies that are “moving their business models toward a nature-positive economy”.
That strategy seems to have paid off. The fund, which counts Microsoft Corp and Taiwan Semiconductor Manufacturing Co among its top holdings, clocked around 13% gains this year.
For other fund managers, positive impact on nature is best achieved through private markets where horizons stretch longer.
“If you want to build a habitat bank, you want to build a vertical farm, you want to build a forest, any of those things requires a period of capital investment,” said Peter Bachmann, managing director for sustainable infrastructure at Gresham House. — Bloomberg
