Funds focused on companies with apparent solutions to nature loss have been the only biodiversity-related investors in the sector to attract net new money this year, as inflows to the strategies so far have plummeted, said a report published on Thursday.

After four years of positive flows to biodiversity-related funds, most of them experienced negative flows in the first nine months of 2024, amid declining general interest in ESG, Morningstar Sustainalytics said in a report.

Biodiversity flows dropped from over $1.2 billion annually, during 2022 and 2023, to around negative $100 million across funds outside the solutions category in 2024 up to September, the report said.

Solutions-focused funds have gained around $50 mln this year so far.

Source: Morningstar Sustainlytics

The analysts identified three types of biodiversity investment strategies:

• Risk-oriented: Investing in companies reducing biodiversity impact
• Solutions-focused: Investing in companies that offer products and services addressing biodiversity loss
• Mixed: Investing in both

The report found 14 strategies focused on solutions, across 34 biodiversity-related funds.

Two-thirds of assets are in mixed funds, while solutions-focused funds make up less than a quarter (22%) of the market, holding around $800 mln.

BILLIONS IN ASSETS

Despite the drop of inflows in 2024, assets in biodiversity-related funds more than doubled over the past three years, driven by product development, reaching $3.7 bln, Morningstar Sustainalytics said.

The biodiversity fund market remains small compared to the climate fund market – which was $530 bln in September.

“It’s still early days for biodiversity investments. Strategies to execute on biodiversity objectives have proved difficult to develop, partly due to a lack of reported corporate data and standard metrics, said Hortense Bioy, head of sustainable investing research at Morningstar Sustainalytics.

“Biodiversity is at the intersection of other more easily investible and better-known themes such as climate change, water, and the environment.”

UNDER-PERFORMANCE

Since 2021, biodiversity funds have generally underperformed compared to ESG and non-ESG peers, partly due to higher fees, with 2022 the only year of outperformance, the report said.

However, biodiversity funds proved more resilient in the market downturn, while mixed strategies have exhibited better returns than risk-oriented and solutions-focused strategies.

Only three biodiversity funds have launched so far this year, reflecting a broader slowdown in ESG fund development following years of rapid growth. At least 10 funds launched in both 2022 and 2023.

“Biodiversity is an emerging topic that investors can no longer ignore both as a risk factor and as an opportunity, particularly in the face of a changing climate and declining global habitat,” said Bioy.

LISTED COMPANIES

Although the report categorised funds as ‘solutions-focused’, all except for ASN Bank’s invest in listed companies, which have the largest environmental impacts.

The solutions-driven funds are mostly invested in industrials. The most popular stock, Xylem, is held by 11 of these strategies, followed by AECOM, American Water Works, and Tetra Tech.

The solutions universe often relies on positive inclusion, rather than exclusions. For example, the $204 mln AXA World Funds ACT Biodiversity Fund targets sectors impacting biodiversity loss, then selects solution providers it says have measurable positive impacts.

By Thomas Cox – t.cox@carbon-pulse.com

*** Click here to sign up to our twice-weekly biodiversity newsletter ***