Under the Canopy: Shedding Light on Biodiversity Funds

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

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

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

By holdings value

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

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

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.