Fund managers increasingly recognise biodiversity on par with ESG

New analysis from Lonsec Research and Ratings has confirmed fund managers have accelerated and elevated their recognition of biodiversity to be “squarely” within their environmental, social and governance (ESG) frameworks, signalling their acknowledgement of its risk not just to the environment but also to investment.

Tony Adams, Head of Sustainable Investment Research at Lonsec Research and Ratings, said in-house data had confirmed the fact that the “loss of biodiversity is not just an ecological concern” and that it “poses significant financial risks that can affect investment performance and portfolio resilience”, with the number of fund managers taking a policy position on biodiversity more than tripling in the last year.

“This upward trend reflects an industry-wide recognition that biodiversity loss is a systemic risk, one that requires integrated and proactive management strategies. For many fund managers, the initial steps involve acknowledging biodiversity risks within broader sustainability or climate change statements,” Adams said.

“However, a closer look at industry practices reveals a spectrum of approaches. Some managers have embedded biodiversity considerations into their comprehensive ESG frameworks, incorporating metrics such as natural capital, deforestation risk, and exposure to sensitive ecosystems. Others have taken a more targeted approach by developing dedicated biodiversity policies, toolkits, and roadmaps to guide their investment and engagement strategies.

“A number of managers are actively engaging with global initiatives and frameworks aimed at promoting biodiversity conservation. For instance, participation in investor coalitions such as Nature Action 100 and adherence to emerging frameworks like the Taskforce on Nature-related Financial Disclosures (TNFD) have become increasingly common.

“These initiatives help standardise reporting and foster collaboration, ensuring that biodiversity risks are identified, measured, and managed more effectively.”

However, Adams noted that industry-wide reception remains “varied”, with many not yet formalising any biodiversity “considerations” into standardised policies underpinned by “clear targets and metrics”.

“Industry analyses highlight that while biodiversity is widely acknowledged within risk assessments and engagement strategies, its integration often occurs indirectly through climate policies or broader environmental frameworks. In some cases, the policy language is generic, with no specific commitments or structured approach to addressing biodiversity loss, underscoring the challenges of operationalising such a multifaceted issue,” he said.

“The evolution of biodiversity policies among fund managers is driven by growing investor demand for robust ESG disclosures and increasing regulatory scrutiny. Improved Lonsec scores and a threefold increase in reported biodiversity positions suggest that the industry is moving toward a more systematic, transparent, and strategic approach to managing biodiversity risks.

“This shift not only reflects heightened environmental awareness but also represents a pragmatic effort to safeguard long-term portfolio performance amid escalating ecological challenges.

“The momentum behind biodiversity in ESG policies signals a significant cultural and operational shift within the asset management industry. With a marked increase in both the number and strength of biodiversity policies, fund managers are demonstrating a deeper commitment to mitigating environmental risks and contributing to a more sustainable financial ecosystem.

“As this trend continues, the integration of biodiversity considerations into investment decision-making will likely become a critical determinant of both financial and environmental success.”