Research from MSCI suggests that investment funds with a ‘biodiversity’ label have delivered, on average, lower risk-adjusted returns than other thematic funds.
The data provider’s ESG Research arm identified 149 funds from around the world that “were thematically linked to biodiversity based on the fund name and investment strategy”.
Of these 149, which collectively accounted for $60bn in assets under management (AUM), only 15 (representing just over $1bn) were designated “pure-play biodiversity-labelled funds”. The remaining funds had less explicit links to biodiversity, such as those focused on waste reduction and the conservation of resources.
“In recent years, biodiversity-labelled funds have, on average, delivered lower risk-adjusted returns versus their peers in the same thematic sphere,” said Rumi Mahmood, the research director of MSCI’s new Sustainability Institute, in a note on the topic.
“This may partly be attributed to the large allocation to cyclical sectors, in particular information technology, which experienced a series of sharp selloffs in 2022.”
Mahmood suggested that the lower correlation with other sustainability themes could “serve as a diversifying function for investors”, although diversification across asset classes was a bigger challenge for biodiversity funds, with more than 90% focusing on developed markets equity.
The recent explosion in interest around nature and biodiversity has prompted a surge in investor activity. Most of the 15 pureplay biodiversity funds that MSCI identified were launched in 2022, according to the research.
Last month, the Taskforce on Nature-related Financial Disclosures unveiled its recommendations for how companies and financial institutions should report on their relationship with the natural world – both in terms of how exposed their business is to biodiversity loss, and to the ways in which the business could contribute to that loss.
The EU’s new European Sustainability Reporting Standards include rules for how companies should report under the Corporate Sustainability Reporting Directive if they identify biodiversity as material to their business.
Shareholders have also been stepping up their stewardship efforts on nature, through two new collaborative engagement initiatives: Spring, run by the Principles for Responsible Investment, and Nature Action 100, run by the Institutional Investor Group on Climate Change.
Mahmood noted that the burst of activity and product launches could be confusing for investors, who “may be confronted with a broad mix of different strategies and investment approaches that can vary significantly in terms of their level of complexity and their clear link to global biodiversity goals”.
“They may range from funds based on exclusion criteria, to ones that apply sophisticated metrics with a clear focus on businesses aligned with global biodiversity goals,” he said.
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