Alessandro Musto Head of ESG Integration and Solutions at Generali Investments
We expect that in the future, companies with higher biodiversity risk will trade at a discount and have higher costs in accessing debt, as is currently the case for those with lagging ESG scores.
The integration of biodiversity into investment strategies is still in its early stages. Despite this, there has been a significant increase in the number of biodiversity-related funds, with equity funds dominating the market.
The first challenge investors face is the quality of available data. Although more companies are making pledges to protect biodiversity, only a small percentage within the Eurostoxx index have set specific targets. Encouraging greater transparency and reporting through engagement is crucial to address this challenge.
The second challenge lies in the limited availability of investments focused on biodiversity solutions. Companies addressing biodiversity issues tend to be small or mid-cap, making it difficult to create a well-balanced portfolio, especially in fixed income. However, as companies communicate more precisely about their biodiversity impact, we expect new solution-focused investment alternatives will emerge.
The third challenge investors face is the sector biases introduced by the simplistic methodologies. Using one single metric may provide an incomplete view, leading investors to overweight sectors with limited impact, such as technology and consumers.
As the biodiversity risk premium increases, the integration of biodiversity criteria into the investment process will be crucial for generating performance and capturing emerging medium- to long-term risks.
Additionally, we expect a shift in the allocation of green bond proceeds towards biodiversity-related projects, starting with sovereign green bonds and extending to corporate green bonds in the fixed-income space.
