Biodiversity Equity

Client-specific concerns

The asset owner sought a biodiversity focused fund to align its investment strategy with environmental stewardship while achieving competitive financial returns. In order to achieve this objective strategies had to display a clear and measurable process investing across the biodiversity spectrum such as habitat restoration, ecosystem resilience, and species preservation.

The investor preferred discretionary over systematic investment approaches and was open to segregated accounts or pooled funds (including seeding new vehicles).

Source: bfinance

Managers varied in their approach to translating biodiversity to listed equities as an asset class. Based on the strategies assessed in this live search, bfinance highlights the below examples of key investable themes within biodiversity equities:

Source: bfinance

Outcome

• Credible biodiversity approach: Standardised measurement tools for biodiversity impact remain nascent, complicating comparative assessments across managers. To assess credibility multiple data points alongside extensive qualitative analysis were used and this ‘mosaic’ of information was utilised to compare and contrast managers.
• Delivering positive absolute returns: While relative performance for many strategies lagged the MSCI ACWI benchmark (albeit often over a fairly short time horizon since inception), the most competitive strategies were able to deliver positive absolute returns, meeting the foundation’s needs for financial sustainability while addressing also biodiversity priorities – a so-called ‘dual objective’ akin to positive impact strategies.
• Manager research challenges: The equity manager universe operating biodiversity equity strategies is relatively small and still growing. bfinance’s approach to consider the broadest possible starting manager universe has an advantage of a fresh review of potential live strategies. Guiding the client to set deliberately open search parameters, such as no minimum live track record length (but not accepting simulations, carve outs or paper portfolios) also maximised the investor’s optionality as an early mover in this focused but growing equity strategy segment.
• Scaling strategies often means fee advantages: Participating managers ranged from global behemoths with over USD 500 billion in assets under management to boutiques and single-strategy managers with under USD 50 million in firmwide assets. At strategy level, roughly 70% of biodiversity proposals had been launched within the prior 3 years. This meant that many track records were still building out and strategy assets for the majority of managers were still scaling. The opportunity to seed growing strategies in a specialist area gave the investor strong pricing power, with the median initial management fee proposal in line with a what bfinance has typically observed in active global equity allocations over three times the size of this mandate.