Are equity markets already pricing the financial risks of biodiversity loss?
Stefano Giglio, Theresa Kuchler, Johannes Stroebel and Xuran Zeng develop quantitative measures of aggregate biodiversity risk and of firms' exposure to it in their paper "Biodiversity risk".
They build a news index and measure exposure through 10-K statements, a survey of 668 academics, finance professionals and regulators, and the holdings of biodiversity-themed funds.
They then test whether industry portfolios sorted on these exposures move with the news. Their main conclusions include:
- About 70% of respondents see physical and transition biodiversity risks as at least moderately material for US firms, with private sector respondents the most concerned.
- Disclosure remains thin, but is rising: about 4.2% of 10-K statements mention biodiversity between 2015 and 2023, with growth driven largely by references to regulation.
- Energy, utilities, real estate, food and pharmaceuticals rank among the most exposed sectors, while software, technology and communication services are the least exposed.
- Within utilities, renewable producers stand out, since wind, solar and hydro projects face land-use and species protection rules.
- Biodiversity risk is not climate risk under another name, as the biodiversity news index moves differently from climate news indices.
- Industry exposures to biodiversity and climate risks are only weakly related, and climate hedges do not hedge biodiversity news.
- Portfolios long less exposed and short more exposed industries gain when biodiversity news worsens, with correlations as large as 20% over the 2010-2023 period.
- About half of respondents think biodiversity risk is not sufficiently priced in stock, commodity, sovereign debt and real estate markets, and only 14% to 19% judge it correctly priced.
This paper shows transition risks are seen as more likely than physical ones to matter within five years, and argues for treating nature as a distinct risk dimension, since climate frameworks alone leave biodiversity shocks unhedged.
Portfolio managers can use the exposure scores the authors released publicly to test sector tilts and hedges today, rather than wait for disclosure to spread.
Correlations however only show prices react to biodiversity news, not that investors earn a premium for bearing the risk. Longer time series and firm-level exposures would clarify how much is priced.