The surge in investments in biodiversity funds has become the “next frontier” of environmental, social, and governance (ESG) investing, according to the European Union’s securities regulator. The European Securities and Markets Authority (Esma) has highlighted the need for increased monitoring to prevent greenwashing in this sector.
Esma stated in a market risks report that sustainable investing, particularly in biodiversity, presents challenges due to the complexity of the topic, as it involves multiple living organisms and lacks standardized metrics. Biodiversity funds currently constitute less than 0.1% of Article 8 and 9 funds, which are ESG-focused funds regulated in the EU.
Despite their small size, biodiversity funds have seen a cumulative influx of €854 million ($1.3 billion) over the past two years, with 73% of these funds being launched since 2022. Esma predicts that the growing public scrutiny and increasing awareness of biodiversity risks will lead to a rapid increase in the number and size of biodiversity-related financial products in the coming years.
To prevent potential greenwashing, Esma and other regulators have intensified their scrutiny of ESG funds. This has prompted asset managers to downgrade over 300 funds from Article 9, which have a clear sustainability objective, to Article 8, which only partially focuses on ESG issues.
Despite these reclassifications, Esma noted that net flows into Article 9 funds have remained resilient. Esma Chair Verena Ross emphasized the importance of maintaining trust in the market and expressed concerns about the risk of greenwashing, as the EU market for sustainable products continues to grow rapidly.
The increasing investment in biodiversity funds reflects a shift towards more sustainable and socially responsible investment practices. However, the complexity of measuring biodiversity impacts poses challenges in assessing the environmental benefits of such funds. As the market expands, regulators are taking steps to ensure transparency and prevent misleading claims, with a particular focus on avoiding greenwashing.
The rise in investments in biodiversity funds highlights the growing public interest in addressing biodiversity risks and protecting the environment. The success of these funds will depend on robust monitoring and reporting standards to accurately measure their impact and ensure that they genuinely contribute to biodiversity conservation.
More detail via The Straits Times here… ( Image via The Straits Times )