August 16, 2019 / Analysis

Biodiversity struggles to achieve momentum of climate funds

By Jessica Tasman-Jones, Portfolio Adviser

Dragon Capital launches biodiversity economics chair to price ecosystems

Biodiversity struggles to achieve momentum of climate funds

The creation of biodiversity economics chair at the University of Exeter has highlighted the differing fortunes for different types of green investing, with funds targeting climate change proliferating while few products exist for investors concerned with biodiversity.

Dragon Capital, which focuses on investments in Vietnam, together with the university, is stumping up £1.6m for the position, which will look to address the central question of whether there is any correlation between biodiversity and the success of the economy. It will also examine whether individuals and organisations can and should place an economic value on biodiversity.

“How can markets price the absence of birdsong? How much are people willing to pay to maintain the existence of, or be compensated for the loss of, biodiversity in all its forms?” said Dragon Capital executive chairman and co-founder Dominic Scriven in a press release announcing the initiative.

Spate of climate change launches

The Sector Equity Ecology category is the largest among Morningstar’s environmental equity categories, but is broader in scope than biodiversity, focusing on funds that invest in products or services promoting a cleaner environment, including  alternative energy, pollution control, water treatment and energy efficiency companies.

Morningstar has no funds available to UK investors that are focused on biodiversity on its database.

In contrast, its inaugural European sustainable funds landscape report published this month highlighted that “a host of climate-related funds came to market”, including the THEAM Quant Europe Climate Carbon Offset Plan and UBS Equities Global Climate Aware funds.

European-domiciled environmental funds

Morningstar category Total funds in category Net assets €
Sector Equity Agriculture 19 1,745,406,577
Sector Equity Alternative Energy 26 3,002,652,550
Sector Equity Biotechnology 31 9,286,078,961
Sector Equity Ecology 78 15,811,940,263
Sector Equity Energy 46 3,870,278,488
Sector Equity Natural Resources 65 8,848,112,500
Sector Equity Water 25 11,882,032,720
Source: Morningstar

The Investec Global Environment fund was among the H1 2019 launches focused on decarbonisation.

“The reason we’re focused on decarbonisation is that it’s an area where impact and investment returns are aligned,” said fund manager Deidre Cooper, speaking during London Climate Action Week. “For us that’s really important because to be truly sustainable from an impact perspective, you need to have that alignment.”

Cooper points to the fact $100trn will pour into decarbonisation efforts over the next three decades.

“From an investment perspective, we really like big, fast growing markets,” she says. “We, as a planet, are currently needing two and a half to three trillion a year and we’re investing a quarter of that.”

Cooper reckons its “difficult to think of anything more impactful than climate change and decarbonisation”.

Biodiversity as important as climate

But Scriven argues biodiversity merits as much attention as climate change, pointing to a United Nations report from May as one of the most recent “truly horrifying pronouncements of late”.

Extinction rates are currently tens, if not hundreds of times higher, than the historic rate with 1 million species currently at threat of extinction, the report said. That is out of a total 8 million plant and animal species on earth.

He “absolutely” believes biodiversity products will one day match carbon climate strategies in terms of fund launches. “The problem is how do you measure biodiversity? And then how do you begin to ascribe values to it? Nobody really knows how to do that so that’s what we’re trying to do.”

ESG versus impact for ecosystems

EQ Investors impact analyst Louisiana Salge ranks climate change mitigation as one of the impact areas that aligns well with investment opportunities, agreeing with Cooper. On the other hand, the wealth manager, which offers positive impact portfolios, has found it hard to invest directly in biodiversity even though it would like to.

“The only related investment opportunities that may be relevant are those companies that mitigate the harm on biodiversity-loss from their operations,” Salge says, but these are more likely to fall within an ESG rather than impact strategy.

Sarasin Sustainable Food and Agriculture Opportunities, for example, holds Deere & Co, which is designing precision technology to limit chemical run-off and biodiversity loss by minimising fertiliser and pesticide use.

Like many impact investors, EQ picks opportunities that align with the UN Sustainable Development goals, in which goals 14 (Life Below Water) and 15 (Life on Land) align with conservation and biodiversity.

Biodiversity tools for investors

Belgian and French researchers attempted to monetise the intrinsic value of biodiversity in a paper published in 2014, but efforts to accurately price it have not taken off, says Salge.

Liontrust fund manager Mike Appleby says the conservation community is doing helpful work for investors to showcase the effect of particular industries on biodiversity.

The Zoological Society of London (ZSL), for example, has created a detailed analysis of the activities of soft commodity companies in the tropics available online. It aims to reduce deforestation and biodiversity loss.

“This information can help proactive investors either avoid companies that are not good at managing the plethora of externalities of their business, or to identify specific issues related to biodiversity and deforestation in order to engage with and improve on how they are managed,” Appleby says.

Conservation bonds

Morningstar’s data team suggests bonds may currently be a more opportune place to find investments targeted on biodiversity, pointing to the rhino bond as an example.

Over a five-year period, five black rhino conservation sites that are beneficiaries of the bond financing will seek to increase the growth rate of the animals by 65%. If those targets are reached bond investors will receive coupon payments.

“Conservationists are battling to fund basic biological management activities, let alone fund critically needed interventions in response to the illegal wildlife trade being perpetrated by criminal syndicates,” said ZSL director general Dominic Jermey, at launch in July.

“Given that we’ve lost so much of our biodiversity already we desperately need to consider new ways of valuing, funding and implementing conservation.”

* This article first appeared on ESG Clarity‘s sister publication, Portfolio Adviser.