Europe’s Asset Managers and Institutional Investors Sharpen Their Focus on Biodiversity

December 17, 2021 — London

Failure to look beyond climate change will result in lost opportunities and increased risks

Cerulli Associates’ latest report, European Environmental, Social, and Governance Investing 2021: Embracing Change and Seeking Impact, shows that Europe’s asset management industry still has a long way to go before the integration of biodiversity-related risks into investment decision-making is standard. A large proportion (65%) of asset managers do not address biodiversity risks within their wider responsible investment policy or have a standalone policy on biodiversity. Of the 35% of managers that do address biodiversity risks, some do not have a clear approach to biodiversity in their policies and they typically lack specific commitments.

Of institutional investors, 18% in Italy, 25% in the U.K., and 35% in France report that they are currently investing in environmental, social, and governance (ESG) products and strategies that focus on biodiversity. The majority are still in the early stages of assessing their portfolio exposure to biodiversity-related risks and they are not yet looking for relevant investment opportunities.

“Whereas climate change risks have captured global attention, the topic of biodiversity has lagged. However, this is changing amid a widening recognition that biodiversity loss is putting more than half the world’s GDP at risk,” says Justina Deveikyte, director of European institutional research.

Currently, the most common approach to addressing biodiversity-related risks is to have a policy that excludes investee companies with activities that negatively affect biodiversity-sensitive areas. However, investment specifically in companies with operations aligned with preventing biodiversity loss and restoring biodiversity remains limited.

Cerulli recommends that asset managers consider developing a policy on biodiversity in the next 12 months and urges managers to participate in industry organizations that focus on biodiversity to establish their credentials in this space.

Cerulli’s research indicates there is a limited supply of thematic funds dedicated to halting and restoring biodiversity loss, including funds that target marine biodiversity loss, ocean pollution, deforestation, and sustainable forest management. It recommends that managers consider launching these funds to respond to nascent demand, which is expected to accelerate over the next 12 to 24 months.

In taking a broad view of ESG investing in Europe, Cerulli concludes that the outlook is bright in all the countries covered in its report. For instance, 82% of managers in Germany anticipate significant demand for ESG index funds—an outlook shared by 81% of respondents in the U.K. and 76% in Switzerland. Some 91% of the exchange-traded funds (ETF) issuers Cerulli surveyed expect significant demand for ESG ETFs in Italy over the next two years, and 89% foresee significant demand for such products in Germany and France.

Cerulli estimates that total European institutional ESG assets (including assets held in vehicles domiciled outside Europe) stood at €6.2 trillion (US$7.4 trillion) as of September 2021, a 69% increase on the 2016 figure. The majority of these assets were within products and strategies that use an ESG integration approach.

Cerulli’s analysis indicates that demand for fixed-income ESG passive products will continue to grow in both the index fund and ETF spaces. 82% of index fund providers anticipate increased demand for emerging and developed market fixed-income products over the next two years. “Offering specialized fixed-income value propositions in both the ETF and index fund domains could create opportunities for managers and ETF issuers to gather fresh flows,” says Fabrizio Zumbo, associate director, European asset and wealth management.

Institutional investors are expected to be the main drivers of the increase in demand for ESG index funds over the next two years, followed by private and retail banks.

Demand for sustainable thematic passive funds is also expected to increase over the next 24 months: 80% of the ETF issuers Cerulli surveyed expect demand for sustainable ETFs to increase and 68% of the index fund providers Cerulli surveyed believe demand for sustainable index products will increase. “Managers that can develop diversified and specialized sustainable thematic value propositions in both the index fund and ETF domains will be well placed to win new business,” says Zumbo.

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