Biodiversity: A theme of growing importance and investment opportunity 

The decline in the variety of plant and animal life on our planet is not just a concern for scientists. It’s rapidly becoming a material issue for financial markets. As ecosystems are compromised, biodiversity loss poses material financial risks and the erosion of shareholder value as it touches so many facets of our day-to-day life. Investing in the protection, restoration or damage mitigation of the wealth in Earth’s flora and fauna opens doors to meaningful returns and long-term financial resilience. Fund managers are realising that biodiversity matters, from both a risk and opportunities perspective.

Biodiversity underpins economic and social stability. Industries such as agriculture, fisheries, forestry, tourism, and pharmaceuticals to name a few, all rely on healthy ecosystems. Pollination, water purification, climate regulation, and soil fertility are often taken for granted but they are essential components that businesses depend on to function. However, they are also threatened as increasing levels of human activity impinge upon finely balanced interactions. When biodiversity declines, these systems are compromised. Consider agriculture. Without pollinators like bees, crop yields fall. Without healthy soil organisms, land loses fertility. We are all undoubtedly aware that many modern medicines are derived from natural sources. As habitats vanish, so does the chance to discover life-saving treatments for pharmaceutical companies.

For investors, this translates to real financial risk. Supply chains are increasingly vulnerable. Input costs such as insurance increase. Regulatory burdens grow and reputational risks mount.  With increasing scrutiny from consumers, investors and fund gatekeepers, companies and fund managers ignoring biodiversity depletion face not only performance challenges but potential wider opprobrium.

The unfortunate reality is that biodiversity loss is already impacting financial systems and potential fund returns in various ways. Physical risks such as deforestation and habitat degradation lead to ecosystem collapse, which can disrupt commodity supplies, reduce agricultural productivity and intensify climate risks like floods or droughts. Transition risks occur as governments move to halt biodiversity loss via regulatory initiatives which impose compliance costs and punitive measures. Companies reliant on biodiversity-damaging practices such as palm oil, soy, beef and mining, may see tighter restrictions and reduced access to markets. Litigation too, remains a serious consideration for any companies that cause biodiversity harm. This locks up capital in contingencies.

Despite the risks, biodiversity also presents a vast, underinvested opportunity. The World Economic Forum estimates that transitioning to nature-positive business models could unlock USD 10 trillion in annual business value and create 395 million jobs by 2030. This is just one statistic. Fund managers have the potential to surf a powerful, long-term growth narrative.

In the UK there are only a handful of fully biodiversity-themed funds offered by groups such as Fidelity, Redwheel, UBAM, M&G and Goldman Sachs. However, the touch points to biodiversity are many and varied and are increasingly finding decent exposures within broader-based sustainability or impact funds.

There is considerable crossover with circular economy, natural capital and sustainable food companies. Investments in nature-based solutions such as reforestation, regenerative agriculture, mangrove restoration, and sustainable water management are no longer as niche as they were. Green bonds and sustainability-linked loans are now being structured to include biodiversity targets and issuance here is becoming broader and more accessible. Funds which have exposure to these themes that we rate include UBAM Biodiversity Restoration, M&G Positive Impact and PIMCO GIS Climate Bond.

More widely, biodiversity is becoming a key pillar of environmental, social, and governance (ESG) investing. ESG considerations are incorporated into virtually all of the funds that we review here at Square Mile. Those that actively integrate biodiversity metrics through frameworks like TNFD (Taskforce on Nature-related Financial Disclosures), can identify mispriced risk and build portfolios better aligned with future regulation and market sentiment. Fund gatekeepers and the ever-vigilant media, are becoming increasingly inquisitive about companies and fund managers’ exposure to biodiversity themes and associated risks especially in areas such as food, apparel, extractives and biomass.

Finally, it’s important to recognise that the current AI and data boom which has been driving markets is adaptable to improving the monitoring and management of biodiversity. This in turn is leading to improved disclosures, better data sets and more accurate risk management. Biodiversity is driving innovation. Innovation drives growth and ultimately improves investment outcomes. The relationship between technology and biodiversity is a virtuous circle.

I believe that biodiversity is where climate change was a decade ago. Indeed, they are two sides of the same coin. As biodiversity related planetary thresholds come under further pressure, markets will increasingly reward companies and funds that have been early and decisive adopters of solutions and mitigants. The funds that build biodiversity into their core strategy now will be better positioned for resilience, alpha generation and sustainability impact in a nature-constrained world.