Biodiversity Impact the Next Frontier in ESG Investing: Report

With growing concern about the accelerating degradation of ecosystems and natural capital, biodiversity is rapidly rising up the ESG agenda, Sustainable Fitch says in a new report.

Although biodiversity remains a niche segment, interest in this area continues to rise, with several asset managers launching dedicated biodiversity and nature-themed funds in recent months.

The move is backed by the generational transfer of wealth with younger investors more attuned and aware of the growing significance of biodiversity when making investment decisions.

Sustainable Fitch expects company and investor pledges to become ‘nature positive’ will increasingly feature alongside their net zero climate commitments, spurred by industry initiatives, regulatory trends, and international agreements – most notably the Kunming-Montreal Global Biodiversity Framework (GBF), agreed at the COP15 last year.

Opportunities for investors to align with the relevant UN Sustainable Development Goals (SDG), SDG14 Life Below Water, and SDG15 Life on Land, are also likely to expand as financing needs rise on the back of the push for a nature-positive economy.

According to the Sustainable Fitch report, the number of green, social, and sustainability bonds issued featuring ‘terrestrial and aquatic biodiversity conservation’ in their use of proceeds rose by 54% in 2022. Engagement with investee companies on such related topics as deforestation and biodiversity impact is also likely to gain traction.

Need For Financing

However, as both a theme and a strategic focus, nature poses challenges for investors. The extensive variety and complexity of nature topics create complications given the limited availability of nature-related expertise within the financial sector.

Each thematic area, for example, deforestation, is potentially highly specialised, making it difficult to construct coherent and sophisticated thematic portfolios.

A  minimum level of expertise in each area is essential to assess meaningful levels of impact and to determine the credibility and materiality of investee companies’ specific targets and plans. The universe of investible assets (e.g. nature-themed labelled bonds) remains fairly small, although it has grown significantly in recent quarters and Sustainable Fitch expects this to accelerate given the need for financing for nature-positive projects in line with GBF targets, and, industry initiatives to transition to being nature-positive.

Sustainable Fitch says its ESG Entity Ratings provide insights to aid assessments of nature’s impact. These include assessments of the extent to which the entity has adopted policies to manage its use of material natural resources and the existence and performance against any environmental targets.