Corner Office Views | Q1 2023

Biodiversity Investing in Europe

More emphasis in 2023

Key Points

57% of surveyed European asset owners plan to invest in broad thematic ESG strategies with a biodiversity focus in the next 12 to 24 months; 49% of asset managers plan to launch such strategies.
Cerulli has identified 13 biodiversity equity funds in the European fund market. More than half of these funds were launched last year and received more than €600 million (US$730 million) from investors.
One of the most critical biodiversity issues for the managers we surveyed across Europe is the lack of appropriate asset and company-specific data.

Biodiversity focus

Cerulli expects both asset managers and asset owners to put more emphasis on biodiversity in 2023, after COP27 highlighted that without protecting and restoring nature there is no feasible way to limiting global warming. More than half of the European asset owners Cerulli surveyed currently do not have a biodiversity policy in place, but 40% plan to develop one in the next two years.

Asset managers in Europe are currently more committed to protecting nature and ecosystems: 86% of the managers we surveyed have a policy on biodiversity at present and 12% will implement one in the next two years.

Biodiversity-themed equity strategies

We believe the market for biodiversity-themed equity strategies will grow significantly over the coming years. Our survey of European asset owners found that 57% of respondents plan to invest in broad thematic environmental, social, and governance (ESG) strategies with a biodiversity focus in the next 12 to 24 months and our survey of asset managers found that 49% of respondents plan to launch such strategies.

Cerulli has identified 13 biodiversity equity funds in the European fund market. More than half of these funds were launched last year and received more than €600 million (US$730 million) from investors. Some asset managers we spoke to confirmed that asset flows have come mainly from retail investors, including banks and family offices. We expect the market for biodiversity-themed equity products to grow substantially, because most of the European asset owners we surveyed intend to invest in broad thematic ESG strategies with a focus on biodiversity in the next two years. For example, 70% of institutional investor respondents in Italy and the UK plan to allocate to such strategies over this period.

Challenges for asset managers

One of the most critical biodiversity issues for the managers we surveyed across Europe is the lack of appropriate asset and company-specific data. The mean species abundance (MSA) metric is the most commonly used biodiversity indicator in the market, but the usefulness of biodiversity indicators will increase with better geospatial data and the disclosure of more company-specific information. However, the asset managers Cerulli spoke with indicated that there is plenty of biodiversity data in the market and that they do not need specific biodiversity indicators to steer their investments.

Managers that are serious about biodiversity should consider joining the Taskforce on Nature-related Financial Disclosures (TNFD) Forum and a signing the Finance for Biodiversity Pledge, particularly if they are thinking about launching biodiversity strategies. Most managers with biodiversity equity funds are part of these initiatives.

Challenges for institutional investors

The most common investing hurdle for the European institutional investors we surveyed is biodiversity-themed strategies’ lack of performance history. Biodiversity-related investments are relatively immature, with a limited track record compared to strategies focused on climate change.

More generally, European institutional investors lack of the internal resources needed to understand biodiversity issues and lack awareness of the financial implications of biodiversity loss. Asset managers should share their knowledge with asset owners to strengthen their relationships with them and help to educate them so that they can make better investment decisions. Some managers have partnered with organizations such as the World Wide Fund for Nature (WWF), the Natural History Museum, and the Cambridge Conservation Initiative to better understand how to use biodiversity in their investment decision-making processes.

Engagement with companies is crucial to reversing biodiversity loss, given that most do not yet incorporate biodiversity as part of their risk management process or corporate strategy. Asset managers are increasingly co-filing shareholder resolutions to have a greater influence on corporate firms. Some managers include nongovernmental organizations (NGOs) in these engagements to gather additional information about the company—they often have local knowledge that asset managers do not have access to.

Commitment to net zero

Ultimately, it is essential for asset managers that sell into Europe to be committed to reaching net zero. Almost all of the institutions Cerulli surveyed across Europe agree that a commitment to net zero is very or somewhat important in their manager searches and more than three-quarters (83%) of Scandinavian respondents consider it very important. Although asset managers’ net-zero commitments are important to institutional investors, conversations have moved on from being committed to net zero to actual net-zero targets and how to achieve reductions in emissions. In terms of reporting climate change risk, most asset owners in Europe expect managers to report their exposure to energy transition and physical climate risks and the carbon footprint of their investment portfolios.

Cerulli Consulting

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Cerulli Associates