A European financial watchdog has highlighted that there is growing interest in biodiversity but is cautious about potential greenwashing within the market.
The European Securities and Markets Authority (ESMA) released its second Trends Risks and Vulnerabilities (TRV) report on Thursday. Biodiversity is now seen by the EU watchdog as the next major frontier in ESG. However, the organisation went on to issue a concern on greenwashing, based on biodiversity’s inherent technical challenges.
“Maintaining an environment of trust is of particular concern to ESMA. In this context, attention must be paid to the risk of greenwashing, as the EU market for sustainable products continues to grow at a robust pace,” said Verena Ross, chair of the ESMA in a statement.
The report contends that although biodiversity is still a relatively small niche in the financial market, funds that target biodiversity have seen a “surge” in inflows over the last year, with biodiversity funds reaching €845 mln in June 2023, up from less than €50 mln in Jun 2021. Two-thirds of these funds have been launched since 2022, highlighting the new interest in such products.
The ESMA believes that biodiversity funds require increased levels of market monitoring due to growing public scrutiny and the increased understanding of biodiversity risks, related to disclosure frameworks.
There is an increasing number of biodiversity-related investment products being launched. However, existing challenges of sustainable investing, such as comparability of metrics and data access and quality, are more complex in the context of biodiversity, due to the topic considering multiple living organisms making it difficult to single out metrics to encompass the topic.
Biodiversity has been identified as a key risk for the financial sector, which is at risk of suffering from the implications of biodiversity loss, but it is also a critical actor in preserving nature, the report said.
The ESMA highlighted how biodiversity risks can be split into physical and transitional risks, and due to biodiversity’s susceptibility to other environmental issues, climate change is a major risk to biodiversity. Those risks can transfer to financial institutions through the impairment of assets and impacts on profitability, such as when freshwater availability is restricted, the report said.
By Tom Woolnough – tom@carbon-pulse.com
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