Secular trends and investability: biodiversity in finance

A few numbers are all we need to get a clear picture of the economic/financial relevance of biodiversity. Human beings depend on ecosystem services for more than half of the global GDP, which is the equivalent of $44 trillion. To conserve biodiversity, we’d need to spend a trillion a year, but today we’re only investing 10% of that amount, leaving a gap of $900 billion. What’s more, interest in all things sustainable runs particularly high among young people. Add to that the fact that the world is on the brink of the most epic transfer of wealth of all times, with baby boomers handing down their assets (and asset management) to their children. 

According to studies run by Responsible, Patient and Reliable Finance Lab at SDA Bocconi (REPAiR Lab), this means that biodiversity can be considered a megatrend, or a secular trend, deriving from a structural change that the world in all probability will have to adapt to.  

In a sphere of finance where investments are increasingly clustering around issues rather than geography, the risk for investor is they may be riding a trend that will dissipate in 12-18 months, and they’ll ending up empty handed. So, it’s vital to identify secular trends, and then to ascertain their investability. 

Twenty some years ago, the first investment funds built around climate change debuted in Italy. Ten years later came others linked to water conversation. Some called these initiatives passing fads. But instead, they recognized structural changes, and the investors and companies that embraced the foundational principles of these funds reaped the rewards - and continue to do so today. 

Intuition, imitation, and opportunism are all too often the forces that drive the issues that new financial products are built on. When these are the reasons for the choice of product, the issues themselves will be subject to cyclical attention that might propel a sudden upsurge in the short term, and a just as sudden downfall a few months later.  And the market prices for these financial products will follow the same pattern. 

We believe instead that demographics, anthropology, ethics and sociology, combined with reflections on technologies and economic scenarios, give us the most reliable lenses for spotting megatrends that will impact our lives - and our investment decisions - in the coming decades. Interest in issues that stand out by these parameters won’t disappear in a few years’ time, but instead will see steady – though admittedly not dramatic - growth. 

Yet it’s not enough to spot secular trends. Because to be investable, we need to be able to find the listed companies in developing and developed countries that best represent the underlying issue. The champions that will be able to cash in on the rising relevance of the issue over time. 

Structural factors related to demographics or the environment suggest that sustainability will still drive the biggest megatrends in the coming years. By now, sustainability in finance is mainstream, so much so that it risks no longer being a differentiator, unless it’s interpreted in a specific way. That’s why so many financial products have been springing up around more specific sustainability-related issues, such as climate change, renewable energy, longevity, mobility, scarce resources, and data security. 

We’re convinced that biodiversity is one of the most promising and investable issues today (along with urban renewal, which our lab is running more research on). If it stands the test of time, the beneficiaries will be asset managers (who will have developed suitable, attractive products for their clients), companies (who will have a conceptual framework that can transform them into champions of change), and investors (thanks to better returns on their investments).