Biodiversity-specific funds passed $1.5 billion by the end of 2023, with eight vehicle launches throughout the period despite relative underperformance across the board.
The total value of assets in funds with “biodiversity” in their titles grew by over $520 million throughout last year to hit $1.509 bln, according to analysis by Carbon Pulse.
Eight fund launches between June and November contributed to the 2023 sum, reflecting investor interest in the theme, with 24 strategies active at the end of the year.
All the newcomers were based in Europe, with German asset manager DWS launching three Xtracker exchange-traded funds focused on different regions in September.
They were all relatively small in size at the close of 2023, at between $49 mln for Ofi Invest to just over $29,000 for Redwheel. BNP Paribas Oasis, CIRCA5000, Mirova, Xtrackers Europe, and Xtrackers USA all raised around $6 mln.
Many funds expanded in size during 2023.
The largest funds in the category remained AXA’s two vehicles with over $580 mln together, up by over $100 mln collectively.
The strategy from La Banque Postale Asset Management subsidiary Tocqueville Finance increased by over €95 mln to reach €144 mln ($159 mln). Swiss Life saw growth of almost CHF57 mln towards close to CHF160 mln ($190 mln).
VANISHING INTO THE CLOUD
Almost all of the funds posted positive returns over 2023, reflecting macroeconomic tailwinds. HSBC saw returns of 26.8% over the period, while Axa Investment Managers’ ACT Biodiversity Equity fund and La Financiere de l’Echiquier’s vehicle had returns of around 10%.
However, conditions for the theme were not easy, with none of the actively managed strategies with benchmarks outperforming their indices.
The rate of increase of assets in biodiversity-themed funds slowed considerably in 2023 compared with 2022, when the figure tripled to reach $984 mln, according to Environmental Finance figures published last year. However, both years saw jumps of around $500 mln.
Alongside the fund launches, one strategy disappeared during 2023. In April, France-based Pleiade Asset Management (PAM) merged its Europe Biodiversite fund with a vehicle that invests exclusively in business-to-business cloud companies.
“We did not see the commercial potential fast enough. Now, we’re just specialised in technology,” Louis de Montalembert, founder of PAM, told Carbon Pulse.
Netherlands-based ASN Impact Investor did not see commercial returns from some of its investees during 2023. Its biodiversity fund flipped from being the only strategy with positive returns during 2022, to the only one with negative ones in 2023 – returning minus 1.3% over the year. Regardless, it still grew by almost $3 mln to reach just under $31 mln.
The fund’s returns were hit by investees incurring start-up costs, with around 40% of its projects being early-stage companies, Karin van Dijk, fund manager at the Dutch investor, and Jasmijn Resink, analyst, told Carbon Pulse in a joint comment.
“While this is certainly not the case for all companies and projects we invest in, it has affected the fund’s performance for 2023,” they said. The percentage of costs should gradually decrease as the funds in which ASN Biodiversity Fund participates realise more projects, they said.
The depreciation of the US dollar against the euro also affected returns, as a quarter of its investee funds are in the food sector, a market that mainly trades in dollars, they said.
UNDERPERFORMANCE
Fidelity International’s fund faced challenges during the year, similar to many other thematic sustainable strategies, fund manager Velislava Dimitrova told Carbon Pulse. It blamed its comparative underperformance on the success of a few technology firms.
“A narrow group of large technology stocks, which are not relevant to the biodiversity theme, dominated the performance of global indices,” said Dimitrova.
The London-based company’s fund saw returns of 7.6%, but underperformed its index by 14.6%. French investor Ossiam said its Food for Biodiversity fund’s returns also suffered comparatively due to a lack of investment in technology companies.
“Higher interest rates and yields led to underperformance of some cyclical and long duration names, and higher financing costs for capital-intensive projects relevant to the theme,” said Dimitrova.
The majority of the fund was concentrated on industrials (29%), information technology (22%), and consumer staples (15%), as of the end of January 2024. Its top three investees were Indian firm National Hydroelectric Power, US software firm PTC, and Dutch consultancy Arcadis.
REASONS FOR OPTIMISM
Nevertheless, investors foresee a brighter future for biodiversity funds. Dimitrova said: “Investors are becoming more vocal about biodiversity. While biodiversity is still a relatively small part of the thematic investing universe, it has grown twice as fast as the overall thematic space over the past five years.”
“Investors have quickly recognised that biodiversity is an essential part of sustainable investing, and as awareness rises, more pressure will be exerted on companies to comply with biodiversity standards.”
ASN said: “We are confident that our investments will yield positive returns in the long term. The fund therefore continues to look for pioneers.” The ASN fund is one of the few that invests in biodiversity-focused companies, rather than only seeking listed companies with reduced nature impacts, while disclosing its biodiversity footprint.
Ossiam saw opportunity for nature investments following the outcome of the Kunming-Montreal Global Biodiversity Framework.
Carmine de Franco, head of research at Ossiam, said: “The increase in global awareness in biodiversity preservation, materialised by COP15 in 2022 and the definition of the 30×30 target – protect 30% of lands, coastal areas, inland waters before 2030 – might result in a more tangible ‘biodiversity premium’ in stock returns.”
Incentives for companies, to better address their impacts on biodiversity, will come from mounting evidence of the relationship between biodiversity footprints and financial performance, he said.
Source: Morningstar, ASN Impact Investors, Fidelity, Ossiam.
The majority of the biodiversity funds were actively managed open-ended vehicles, although seven were passively tracking indexes. One fund was close-ended, Impact Earth’s venture-focused Amazon Biodiversity Fund ($48 mln), meaning it has a fixed number of shares offered by an investment company through an initial public offering.
By Thomas Cox – t.cox@carbon-pulse.com
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