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July 13, 2022updated 03 Aug 2022 9:00am

Nature funds stagnate amid impact-washing worries

Asset managers are ahead of banks in their efforts to drive capital into biodiversity-focused investments in what is a nascent market. But a clear definition of ‘nature-positive’ is lacking, raising concerns over potential greenwashing.

By Virginia Furness

nature funds, biodiversity
A distant dream? Investors can’t measure the opportunity captured within biodiversity. (Photo by quickshooting via iStock)
  • Impact on biodiversity tends to be measured via the damage caused by economic activity rather than the latter’s positive effect.
  • Claims of ‘nature-positive’ impact may amount to greenwashing, say experts and investors.
  • Morningstar lists only seven biodiversity funds and two natural capital/nature funds, with combined assets of $285m.

From policymakers and central banks to retail investors, there is increasing awareness that nature and biodiversity loss pose substantial risks to the financial system. The World Economic Forum (WEF) warns that more than half the world’s $44trn in GDP is at immediate risk due to nature loss.

In response, the financial industry is mobilising. Regulators are signalling that they are taking biodiversity risk seriously. In France, asset managers are now mandated by law to disclose nature-related and biodiversity loss risk, while the Dutch central bank has already started assessing financial institutions’ biodiversity risk.

But it remains hard to put a price on biodiversity and thus to measure positive impact on nature. Rather, currently available methodologies, such as that devised by Paris-based fintech firm Iceberg Data Labs, tend to measure the negative impact of economic activity on biodiversity.

Still, banks and asset managers – most notably the latter – are innovating to link private capital to nature in a bid to meet the total shortfall in nature financing, which the WEF puts at $4.1trn between now and 2050. Examples of products on offer range from rhino bonds and biodiversity retail funds to outcome-payment funds.

A slow start

It is still early days, and asset managers are approaching the market with caution. Research house Morningstar lists only seven biodiversity funds and two natural capital/nature funds with combined assets of $285m, as against the $2.9trn in dedicated ESG funds, though other managers such as BNP Paribas Asset Management do have thematic funds linked to nature, such as its Ecosystem Restoration Fund.

There is, after all, growing concern that the desire to do less harm to nature – and to tell the world about it – will give rise to false claims that an investment is nature- or biodiversity-positive. That is, according to the WEF, it contributes to halting and reversing nature loss, although there is not a widely agreed definition.

“We have to be careful with these concepts – greenwashing is a significant risk,” says Roel Nozeman, senior adviser on biodiversity at Dutch firm ASN Bank, which runs the ASN Biodiversity Fund, a $27.3m impact vehicle listed on Euronext.

Truly positive impact on biodiversity remains the exception rather than the rule, according to a report published last month by the Partnership for Biodiversity Accounting Financials (PBAF), an industry-led organisation working to help set the standard for measuring and disclosing biodiversity impact in the financial industry.

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Despite the many financial institutions introducing policies on deforestation or aiming to be nature-positive by 2030, PBAF says, there is still a growing volume of deforestation, land degradation, over-exploitation, polluted soil and plastic in oceans.

Accordingly, PBAF advocates caution when claiming positive impact. There should be no room for greenwashing, which – in addition to carrying reputational and liability risks – can unintentionally lead to further biodiversity loss, the organisation says.  

Claiming a loan or investment has a positive impact on biodiversity is not yet possible because no clear methodology for measuring it is available, agrees Robert-Alexandre Poujade, ESG analyst in charge of biodiversity at BNP Paribas Asset Management’s (BNP Paribas AM) sustainability centre.

The French fund house’s biodiversity impact report, published last week, stops short of providing indicators that claim to show a positive impact. Instead, it discloses its biodiversity footprint, a figure showing the negative impact on biodiversity of investee companies, expressed in kilometres squared (km2) of mean species abundance (MSA). MSA captures the conservation status of an ecosystem in relation to its original state, undisturbed by human activity.

Using a methodology provided by Iceberg Data Lab, BNP Paribas AM calculates its financed biodiversity footprint at around -8,000km2 MSA, meaning its investments maintain a fully degraded area equivalent to five times the size of London, annually.

The bottom line is that positive impact means more biodiversity, PBAF says in its recent report. “For an investment to have… a positive impact on biodiversity, firms provide evidence that their investment either has had, or present convincing arguments why it will result in more (wild) animals, plants or microbes in a given area.”

Can buying stocks be an impact strategy?

But ASN Bank’s Nozeman argues that it is not possible to invest in most listed stocks and have a positive impact on biodiversity – and that therefore labelling large-cap equity funds with a nature or biodiversity tag poses a significant risk.

“From our experience with ASN Bank’s biodiversity footprint, we know that almost all listed companies have a net negative impact on nature,” he says. “This is logical because most of them use resources, and emit substances into the air [and] water that effect biodiversity. If you want to set goals and work towards restoration, you need to do something else.”

This led ASN to set up a biodiversity impact fund of its own with a remit to invest only in specialist companies, funds and projects in the areas of forestry, agroforestry, sustainable seas fisheries and ecotourism, rather than large listed companies that promote biodiversity policies.

By contrast, French asset manager Ossiam, for example, offers a £26.38m Food for Biodiversity exchange-traded fund (ETF), the top five holdings of which are retail giant Costco, fast-food giant McDonald’s, coffee chain Starbucks and consumer conglomerates Nestlé and Unilever.

nature funds, biodiversity
Robert-Alexandre Poujade of BNP Paribas Asset Management says the French fund house wants data providers to develop methodologies for measuring positive impact. (Photo courtesy of BNP Paribas)

However, with the policy environment developing fast, funds will soon be expected to prove they deliver on claims of nature-positive impact and restoring biodiversity, warns Anita de Horde, Amsterdam-based coordinator of the Finance for Biodiversity Foundation.

UBP Asset Management’s (UBP AM) Biodiversity Restoration Fund, launched in September last year, is one such product. Fund manager Charlie Anniss picks “solutions providers” from a universe of around 200 listed equities under two themes: protect and restore.

In the absence of a single measure for biodiversity, UBP AM has set up a biodiversity committee to engage with investee companies to promote better practice and disclosures. the Swiss firm also works with conservation partners to identify relevant key performance indicators to measure progress in promoting abundance and variety of species as well as ecosystem integrity in different sectors.

Working towards impact standards

Standard-setters and others are also working hard to help develop measurement and reporting of positive impact on biodiversity.

Iceberg is working to update its methodology by the end of 2022 to include positive impact measurement, while the PBAF standard offers recommendations and requirements for claiming-positive biodiversity impact in project finance.

And on 28 June, the Taskforce on Nature-related Financial Disclosures (TNFD) released the second version of its beta framework for nature risk management and disclosure. TNFD acknowledges that the term ‘nature-positive’ is not yet well defined or understood but intends to align its own definition with the UN Convention on Biological Diversity Global Biodiversity Framework (GBF). This is due to be ironed out at the UN Biodiversity Conference (Cop15) in December.

BNP Paribas AM encourages data providers to try to align their biodiversity measurements with the PBAF and the UN-backed Align project, says Poujade. They should, he adds, pay particular attention to spatial precision and accuracy of measurements, responsiveness to a company’s mitigation efforts, and feasibility of applying such measurements at scale.

“We also invite data providers to develop methodologies for measuring positive impact, which is an integral part of assessing overall impact on biodiversity,” adds Poujade.

This year, the concepts ‘nature-positive’ and ‘positive impact’ will be discussed at the European Commission’s Business and Biodiversity platform, Finance for Biodiversity Pledge, and World Business Council for Sustainable Development.

Few investment funds are being marketed as nature-positive so far, something de Horde is glad about. On the other hand, fears of being accused of ‘impact washing’ may be slowing the pace of investment in biodiversity and nature.

Among other things, the recent scandal to hit German fund house DWS and the aggressive backlash against ESG in the US lately may exact a toll on the planet.

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