Biodiversity fund to target high-net-worth investors, family offices

The Kunming-Montreal Global Diversity Framework is to biodiversity what the Paris agreement is to climate change, and local investment firm Skjander aims to ride its growing investment appeal across the globe.

Family offices and high-net-worth investors have the opportunity to harvest virgin investment ground by signing up for Australia’s first biodiversity fund that is aiming to raise between $50 and $70 million.

The Skjander NSW Biodiversity Fund – it will charge a two per cent fee and 20 per cent performance fee – will initially tap into the New South Wales biodiversity market, the largest and most mature of its kind in the world, which was established in 2016.

Longer term, the fund’s ambitions are global in the wake of the Kunming-Montreal Global Diversity Framework that has a goal of cutting biodiversity loss 10-fold by 2050. Called the “Paris agreement” for nature – it was signed by 196 countries in 2022 – it is proving a catalyst for similar biodiversity markets globally.

Skjander chief executive officer Dr. Karel Nolles says although the initial size of the offering to professional investors (it will specifically exclude retail investors) for the seven-year fund is small, the long-term potential for the global biodiversity market is enormous.

“Biodiversity is forecast to eclipse carbon in both compliance and voluntary transactions, with the global market forecast to reach $US160 billion ($247 billion) by the end of this decade. Markets have been established or announced in 11 jurisdictions already, and as they become operational, we aim to be early entrants with 10 per cent of the fund being allocated offshore,” he says.

But the initial focus will be the NSW market where the State Government has required property developers to offset land-clearing by buying biodiversity credits under the NSW Biodiversity Offset Scheme (BOS) since 2016. Market pricing for BOS has risen 15 per cent a year for the past two years. Skjander’s goal is to outperform the general BOS market over the life of the fund.

In this highly regulated scheme, NSW landholders generate credits by securing and managing part of their land specifically to improve biodiversity. The land use change is registered on land title in perpetuity, with the landowner performing specific management actions on the land including weed and pest management, fire management and restoration actions.

There are more than 380 ecosystems and species credits available in NSW, backed by funds held (for 20 years) by a government agency.

Skjander estimates there will be a minimum $300 million shortfall in biodiversity credits over the next five years specifically related to land clearing by announced renewables projects in NSW, which has a NSW Government target of an additional 12GW of renewable generation by 2040.

“By our calculations, there will be between $300 million to $500 million in additional demand for biodiversity credits from currently known infrastructure projects alone over the next five years,” says Nolles. Annual market turnover in NSW in the past two years was about $200 million a year.

“This estimate leaves aside Inland Rail and Transgrid that will likely need hundreds of millions of dollars of credits, as well as any other development. You add those numbers up and the cumulative additional demand by 2030 is heading towards $1 billion.”

To take advantage of this opportunity, Skjander has developed biodiversity foot-printing models to identify and buy a pipeline of difficult-to-source biodiversity credits.

As Nolles says, “a lack of credit availability and slow rate of credit supply to market points to a looming ‘supply crunch’. We have identified and will acquire credits in these key areas that can later be sold as demand eventuates.”

Skjander will also seek to package and resell biodiversity credits to corporations in voluntary markets looking to obtain reportable positive environmental impacts under frameworks such as the Taskforce on Nature-Related Disclosures (TNFD) or the International Sustainability Standards Board (ISSB).

Nolles is cognisant of the risks in a market that is new (especially overseas), citing regulatory and market risk.

“Biodiversity markets are created by governments and are particularly susceptible to changes in government policy and design,” he says.

“They are also relatively small and (apart from NSW) in the early stages of development, so prices for all credit types may not always be available. In addition, there’s no listed market for these assets providing liquidity.

“Global voluntary biodiversity markets exist but are quite small. Skjander has engaged with more than 100 companies about their potential interest and have concluded that there is a realistic possibility of such transactions emerging during the life of the fund. However, it is an undeveloped market and needs to be commercially confirmed.”

Nolles is cautiously optimistic that this fund will be the first of several in a market space he believes will grow exponentially.

“Being the first fund, it’s very much a toe-in-the-water exercise, to see just what the appetite is like. This is why we’re targeting high-net-worths and family offices as we think they will appreciate an asset with the potential for commercial returns, has environmental impact, and based on our analysis, having a low correlation to the S&P/ASX 100 equities index. We certainly don’t see the big APRA-regulated funds participating – at this stage.”

In a paper titled, The cost of biodiversity – what nascent biodiversity markets are telling us, Nolles and his co-author Liz Heagney wrote: “We expect (environmental) credit products to dominate future biodiversity investment, because, if properly designed, they can be fungible, tradeable and liquid – all the characteristics that facilitate investment.”  Skjander is about to discover whether family offices and high-net-worth investors agree.