Investor demand for biodiversity strategies steps up a gear

Biodiversity is increasingly becoming a key theme for investors, alongside wider climate and net zero considerations. The interaction between climate change and biodiversity – known as the climate/biodiversity nexus – is becoming a prominent topic of discussion, while continued growth in the number of dedicated biodiversity-related strategies in the market is also driving interest.

Until relatively recently, investment solutions for investors looking to incorporate biodiversity into their portfolios have been limited especially in listed assets, compared to a much larger range of broader climate-based offerings. However, over recent years the number of products targeting biodiversity-related outcomes has grown exponentially, fuelling significant growth in assets under management. 

Global growth

Global assets held in biodiversity-focused open-ended products and exchange traded funds (ETFs) have more than doubled over the past three years to $3.7bn, Morningstar data shows¹ . Meanwhile the number of biodiversity ETFs and open-ended funds has risen to 30 from 21 a year earlier, according to Bloomberg² . This is a fledgling market but it is growing rapidly and being in its infancy means there is scope for innovative product development.

AXA IM is a pioneer in biodiversity, having launched a listed equity biodiversity-related strategy and ETF in 2022. In addition, we partnered with Smart Pension, one of the UK’s leading workplace pension providers, in 2022 to focus on biodiversity, with the objective of improving both investor returns and positive environmental outcomes.

Naturally investors are looking to meet their financial objectives as well as their sustainability goals. Biodiversity-labelled products averaged returns of around 11% in 2024, a favourable performance compared to funds related to renewable energy, carbon and electric vehicles, Bloomberg said³ .

Elsewhere, one analysis shows that more than a third of investors globally, at 36%, now describe biodiversity as being either at the centre, or a significant part of their investment policy⁴ . This is expected to increase to 58% by 2026, a clear signal of the magnitude and speed at which the topic is moving up our clients’ agenda. 

While challenges persist, there is noticeable improvement

A lack of suitable investment data, research and ratings is now described as a “major challenge” by 38% of investors compared to 53% a year ago, according to the same analysis. So, while there is a need for greater and more robust measurable data around biodiversity, the picture is improving.

There is also no standard market definition of the biodiversity investment universe, with most biodiversity strategies sitting within global large cap equity, while others are in small-or-all-cap indices – underlining the importance of active management and stock-picking.

Meanwhile, regulatory requirements are also putting biodiversity further under the investment microscope. For example, under France’s Article 29, financial institutions must disclose biodiversity-related as well as climate-related risks. Meanwhile the Sustainable Finance Disclosure Regulation (SFDR) requires investors to disclose several Principle Adverse Indicators, including those which are biodiversity related.

While biodiversity is still an emerging theme, we are encouraged to see regulatory and reporting tailwinds and improving datasets and, crucially, growing investor demand. Together, we expect this to drive further momentum in biodiversity investment, creating potential new opportunities and even greater scope for tackling this vital issue.