EU watchdog monitors surge of cash going into biodiversity funds

The surge in money going into biodiversity funds is the “next frontier” of environment, social and governance (ESG) investing and warrants increased monitoring to avoid greenwashing, the European Union’s securities regulator said on Thursday (31 August).

The European Securities and Markets Authority (ESMA) said data challenges in sustainable investing generally are exacerbated for biodiversity investments.

“This is mainly because the topic covers multiple living organisms, making it difficult to single out singular, standardised metrics,” ESMA said in a market risks report.

Biodiversity related funds remain a small niche, less than 0.1% of so-called Article 8 and 9 funds, which refer to funds regulated in the EU that focus on ESG investments.

The cumulative flow of money into biodiversity funds reached €854 million in the two years to June 2023, with 73% of the funds launched since 2022.

“While the market is still small … the growing public scrutiny and increasing understanding of biodiversity risks raise expectations for biodiversity-related financial products to rapidly increase in number and size over the next years, hence warranting increased levels of market monitoring,” ESMA said.

Tougher scrutiny of ESG funds by ESMA and other regulators keen to stop potential greenwashing, or funds exaggerating their ESG credentials, prompted asset managers to “downgrade” over 300 funds from Article 9, which have a clear sustainability objective, to Article 8, or partly focusing on ESG issues.

Despite these reclassifications, net flows into Article 9 funds have remained resilient, ESMA said.

“Maintaining an environment of trust is of a particular concern to ESMA. In this context, attention must be paid to the risk of greenwashing, as the EU market for sustainable products continues to grow at a robust pace,” ESMA Chair Verena Ross said.

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