Do investors care about biodiversity?
Alexandre Garel, Arthur Romec, Zacharias Sautner, and Alexander F. Wagner investigate whether investors price corporate biodiversity impact using the corporate biodiversity footprint (CBF) indicator in their article "Do investors care about biodiversity?".
The CBF aggregates biodiversity loss caused by a firm's activities related to land use, greenhouse gas emissions, water pollution, and air pollution.
Their main conclusions include:
- The CBF does not explain cross-sectional stock returns between 2019 and 2022 on average.
- Between October 2021 and December 2022, a one-standard deviation higher log(CBF) is associated with 0.19% higher monthly returns (2.2% annualised).
- A biodiversity footprint premium (higher returns for firms with larger footprints) emerged after October 2021, following the Kunming Declaration.
- Large-CBF firms had higher implied costs of capital after the Kunming Declaration.
- In the 3 days following the Kunming Declaration, large-CBF stocks experienced a cumulative 1.14% price decline relative to small-CBF stocks.
- The launch of the Taskforce on Nature-related Financial Disclosures (TNFD) in June 2021 had a similar effect, with large-CBF stocks declining 1.5% relative to small-CBF stocks in the 3 days after.
- The biodiversity footprint premium is larger in countries with low biodiversity protection, suggesting greater transition risks in these markets.
- Almost 70% of Nature Action 100 target firms are in the top quintile of the CBF distribution.
This article provides new evidence on the pricing of biodiversity risks in financial markets and the importance of consistent local and global policies and disclosure standards to materialise this risk.
The complexity of the CBF metric may however pose challenges for practical implementation and generalisation to additional markets or asset classes.