Biodiversity impact investment is gaining traction among investors, says Sustainable Fitch, Fitch Ratings’s sustainability arm. While biodiversity is a growing trend, the space is not without its challenges.
“Thematic and impact investors are likely to place more attention and resources on nature and biodiversity in the coming years, including as a focus for engagement,” the sustainability rating agency noted.
Last year saw the launch of nine biodiversity funds with total assets under management of US$984 million. In the fixed income space, labeled debt capital market issuances with use of proceeds channeled toward terrestrial and aquatic biodiversity conservation grew by 54%.
Additionally, carbon credits linked to nature-based solutions, sovereign carbon credits, biodiversity offset credits and debt-for-nature swaps have also been gaining momentum in the past year.
Water consumption remains the top nature-related target among Sustainable Fitch’s rated entities by a long shot.
According to Sustainable Fitch, the growth of this space is supported by a combination of multilateral, governmental and investor-led policies and initiatives including the Global Biodiversity Framework, which was signed by over 190 countries at the 15th United Nations Climate Change Conference of the Parties, known as COP15.
At the voluntary financial sector level, over 140 institutions with assets under management valued in excess of US$20 trillion have signed the Finance for Biodiversity Pledge. The pledge requires investors to begin assessing and reporting biodiversity-related impacts by 2024.
While COP15 laid the groundwork for biodiversity investing and multiple jurisdictions are introducing regulations to protect nature, biodiversity investing, both as a theme and as a strategic focus, is posing challenges to investors.
The twin challenges of requiring specialized expertise in each specific subcategory of biodiversity investing as well as the universe of investable assets remaining relatively small despite its considerable percentage growth are arguably leaving investors wondering if the costs involved with entering the space are worth it.
In contrast with investing directly in biodiversity-labeled instruments, carbon offsetting involves a lower entry barrier, but the practice has garnered some backlash over the legitimacy of the carbon offsetting projects and its potential as a tool for greenwashing.
Additionally, determining equivalence, additionality and permanence is difficult for carbon offsetting given the complexity and location-specific characteristics of ecosystems, the agency explained.