Under the Canopy: Shedding Light on Biodiversity Funds

Blog post
7 min read
Kishan Gangadia
October 21, 2024
Key findings
  • AUM in biodiversity-named funds grew by around 50% in the year to September 2024, but further standardization or definition of minimum standards may be important to support continued growth.
  • Biodiversity metrics, including geospatial data, can provide investors with clearer insights into these funds and support them in identifying and managing nature-related risks and opportunities.
  • Over half of all biodiversity funds are SFDR Article 9, indicating a strong focus on sustainability and impact. This bodes well for directing capital flows to the most impactful biodiversity mandates.
As COP16 kicks off, investors are again thinking about biodiversity as an investment theme. Although the sector is still in its infancy, we are already seeing a broad range of investment approaches being used, making it difficult for investors to compare and contrast. In this blog post, we take a deep dive and shed light on the current state of the sector.
A small but budding market
Globally, we identified 24 pure-play biodiversity-labeled funds (i.e., funds including biodiversity in their fund names and investment strategies) with assets under management (AUM) growing to USD 1.6 billion, a 50% increase in the year to September 2024. All 24 funds are domiciled in Europe and only four are available for sale outside the region — suggesting investor demand for pure-play biodiversity funds has yet to develop globally. Nature-based investing includes a wider universe of funds thematically linked to biodiversity (e.g., ecology),[1] but in this analysis our focus is on pure-play biodiversity funds. Investor choice is currently limited to equity funds, mostly through large caps listed in developed markets. The majority (around 80%) are actively managed, including active exchange-traded funds (ETFs), with five traditional ETFs tracking biodiversity benchmarks (e.g., the Euronext ESG Biodiversity Screened World Index). Over 40% of total AUM is concentrated in just two funds run by AXA Investment Managers, which were both launched in 2022 (AXA IM ACT Biodiversity Equity ETF and AXA WF ACT Biodiversity), likely benefiting from early-mover advantage.[2] New product launches would help to diversify the market and cater to a broader range of investor preferences or risk appetites, such as small caps. However, biodiversity-labeled fund launches have slowed in 2024, with only two new funds to date (compared to 10 in 2023), underscoring the sector's infancy and a need to better understand how these strategies are built.
Diverse ecosystem of investment approaches used alongside exclusion policies
Of the 10 largest biodiversity-labeled funds by AUM, all apply an exclusions policy in their investment approach, ranging from sectors to global norms, as detailed in the exhibit below. Biodiversity indicators (e.g., footprint scores) and ESG integration also play an important role, though the use of recognized biodiversity frameworks is less established, often due to the use of proprietary methodologies. We observed some funds have a more explicit focus on positive biodiversity impacts than others (i.e., restoring biodiversity), though defining such products is challenging in the absence of a common market understanding.[3] Two funds also allocate up to 25% of their management fees to conservation organizations.[4]
Seeing the wood for the trees — investment approaches used by the 10 largest biodiversity-labeled funds
This chart shows the various investment approaches of the 10 largest biodiversity-labeled funds.
Data as of Aug. 31, 2024. Biodiversity funds use a combination of the above approaches (n=10). Source: MSCI ESG Research
Approach
Examples
Approach

Exclusions policy

Examples

Exclusion criteria for sectors, global norms, controversies or ESG factors. E.g., companies involved in biocides, hazardous chemicals or significant environmental controversies, industry impact thresholds based on Science Based Targets Network (SBTN)/ Exploring Natural Capital Opportunities, Risks, and Exposure (ENCORE) matrix, extractive sectors, United Nations Global Compact (UNGC) violations, minimum biodiversity/ESG scores.*

Approach

Biodiversity indicators

Examples

Biodiversity footprint scores, biodiversity Socially Responsible Investing (SRI) ratings or Biodiversity Impact Measurement and Assessment Practices (B-IMAP) scores.

Approach

Biodiversity frameworks

Examples

Partnership Biodiversity Accounting Financials (PBAF), Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES), SBTN and Kunming-Montreal Global Biodiversity Framework.

Approach

Biodiversity-related Sustainability Development Goals (SDGs)

Examples

Activities aligned with or contributing to targets defined by one or more biodiversity-related SDGs, e.g., clean water and sanitation (SDG 6), life below water (SDG 14) and life on land (SDG 15).

Approach

Biodiversity impact focus

Examples

Emphasis on positive biodiversity impacts and biodiversity loss, e.g., Mean Species Abundance (MSA).

Approach

ESG integration

Examples

Incorporating ESG data in the investment process.

Approach

ESG scores

Examples

ESG scoring system at the company level.

Approach

Climate indicator

Examples

Temperature alignment, Climate & Biodiversity Maturity (CBM) score.

* SBTN provides guidance for institutions to set measurable, science-driven targets to manage their impacts on nature. ENCORE is a tool used to assess exposure to nature-related financial risks.
Unearthing a surprising mix of constituents
At the portfolio level, biodiversity funds tend to be invested in sectors more sensitive to the economy, with industrials allocations averaging 30% — the largest sector representation — followed by information technology and consumer discretionary.[5] Defensive sectors are typically less than one-quarter of portfolios, while there is minimal to no exposure to real estate and energy. Our analysis revealed that sector allocations can vary significantly across funds, as shown by the black bars in our next exhibit, reflecting different approaches to biodiversity strategies. For example, the Ossian Food for Biodiversity ETF has around a 60% allocation to consumer staples given its focus on the agricultural and food sectors.
Industrials stand tall in biodiversity-labeled funds
This chart shows the sector exposures of biodiversity-labeled funds.
Data as of Aug. 31, 2024. The green and yellow bars represent the distribution and quartiles of funds' GICS sector exposures; the median is the intersection of these bars. The black bars represent the minimum and maximum sector exposures. Includes biodiversity funds where sector data was available (n=20). Source: MSCI ESG Research
Delving deeper into the underlying holdings, six of the 10 most-held companies are in the industrials sector, including Deere & Co., a U.S.-based manufacturer of agricultural and forestry equipment, held by 11 funds (the most of any holding). Companies in the environmental, water and waste industries are also well represented. Only four of the most-held companies also appear in the top 10 list by holdings value, suggesting meaningful variation in position-sizing across funds. Interestingly, semiconductor companies and software businesses feature prominently due to their roles in enabling AI and tech-driven environmental innovations. For instance, NVIDIA Corp.'s advanced chips power Deere's agri-tech solutions, reducing herbicide use.
Top 10 most-held companies in biodiversity-labeled funds
By count
Company
Sector
Subindustry
# Funds
Company

Deere & Co.

Sector

Industrials

Subindustry

Agricultural & farm machinery

# Funds

11

Company

Xylem

Sector

Industrials

Subindustry

Industrial machinery – water

# Funds

10

Company

Thermo Fisher Scientific

Sector

Healthcare

Subindustry

Life sciences tools & services

# Funds

8

Company

American Water Works Co.

Sector

Utilities

Subindustry

Water utilities

# Funds

8

Company

Waste Management

Sector

Industrials

Subindustry

Environmental & facilities services

# Funds

8

Company

Brambles

Sector

Industrials

Subindustry

Environmental & facilities services

# Funds

8

Company

AECOM

Sector

Industrials

Subindustry

Infrastructure consulting

# Funds

7

Company

ASML

Sector

Information technology

Subindustry

Semiconductor equipment

# Funds

7

Company

Novozymes

Sector

Materials

Subindustry

Specialty chemicals

# Funds

7

Company

Schneider Electric

Sector

Industrials

Subindustry

Electrical components & equipment

# Funds

7

By holdings value
Company
Sector
Subindustry
Company

SAP

Sector

Information technology

Subindustry

Systems software

Company

Xylem

Sector

Industrials

Subindustry

Industrial machinery

Company

Republic Services

Sector

Industrials

Subindustry

Environmental & facilities services

Company

Ecolab

Sector

Materials

Subindustry

Specialty chemicals

Company

NVIDIA

Sector

Information technology

Subindustry

Semiconductors

Company

Thermo Fisher Scientific

Sector

Healthcare

Subindustry

Life sciences tools & services

Company

Autodesk

Sector

Information technology

Subindustry

Application software

Company

Advanced Drainage Systems

Sector

Utilities

Subindustry

Water utilities

Company

American Water Works Company

Sector

Utilities

Subindustry

Water utilities

Company

AECOM

Sector

Industrials

Subindustry

Construction & engineering

Data as of Aug. 31, 2024. Based on funds in MSCI's coverage (n=19). Holdings value (in USD) takes account of position-sizing. Source: MSCI ESG Research
Strong Article 9 focus suggests impact
Over half the biodiversity-labeled funds (including four of the five largest) are classified as Article 9 funds under the EU's Sustainable Finance Disclosure Regulation (SFDR), indicating a strong commitment to sustainability objectives within the biodiversity-fund sector. This bodes well for directing capital flows to the most impactful biodiversity mandates.
Shades of green — EU SFDR fund classifications
This chart shows the EU SFDR split for biodiversity-labeled funds.
Data as of Aug 31, 2024. Source: MSCI ESG Research
Mapping assets to biodiversity-sensitive areas brings further insights
Using MSCI's proprietary geospatial data, which maps physical assets located in biodiversity-sensitive areas,[6] we found biodiversity funds are broadly less exposed to areas with high deforestation risk than the constituents of the MSCI ACWI Index,[7] though this is not universal. These metrics provide a foundation for evaluating a fund's potential exposure to adverse (or positive) biodiversity impacts, which can vary considerably even across biodiversity-labeled funds, as shown in the exhibit below, highlighting the need to analyze investee companies at a more granular level.
Fund allocations to companies with physical assets in areas with high deforestation risk
This chart shows the exposure of biodiversity-labeled funds to companies with physical assets in areas with high deforestation risk.
Data as of Aug 31, 2024. Based on funds in MSCI's coverage universe (n=19). Source: MSCI ESG Research
Looking ahead
Under the Taskforce on Nature-related Financial Disclosures (TNFD) framework and the EU Taxonomy, both the quality and availability of biodiversity data is expected to improve, helping investors integrate nature-related risks in their portfolios. Coupled with new biodiversity tools being developed by data providers such as MSCI (e.g., geospatial data), it is now easier to build more-targeted biodiversity funds, potentially reducing greenwashing risks in the process. As investors increasingly consider the impact of their investments on nature through the prism of climate and sustainable investing, we are likely to see product launches with enhanced relevance. Given the breadth of investment approaches used, further standardization or definition of minimum standards may be important for supporting continued asset growth in biodiversity funds.
Kishan Gangadia
Kishan Gangadia
Vice President, MSCI Research

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1 As of September 2024, MSCI ESG Research estimates there to be ~150 biodiversity-related funds, identified by keywords thematically linked to biodiversity, with assets totalling around USD 67 billion.2 AXA published its seminal “Into the Wild” report calling for the creation of the Taskforce on Nature-related Financial Disclosures in 2019.3 Fund strategies that also focus on restoration, in addition to protecting biodiversity, avoiding biodiversity-related financial risks or identifying opportunities that enable environmental solutions.4 UBAM Biodiversity Restoration Fund and AXA WF ACT Biodiversity Fund.5 We define sectors using the Global Industry Classification Standard (GICS®). GICS is the global industry classification standard jointly developed by MSCI and S&P Global Market Intelligence.6 The percentage of the fund's market value invested in issuers with three or more known physical assets in Biodiversity Sensitive Areas denoted as either Healthy Forests, Intact Biodiversity Areas, Prime Areas for Conservation or Deforestation Fronts.7 The MSCI ACWI Index captures large- and mid-cap representation across 23 developed and 24 emerging-market countries. With 2,687 constituents, the index covers approximately 85% of the global investable equity opportunity set.

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