Biodiversity decline and financial implications
Biodiversity, the variety of life across all ecosystems, is declining at an alarming rate, posing serious risks to the goods and services that humans rely on. This deterioration has caught the attention of companies, investors, and financial regulators due to its potential economic impact. The Taskforce on Nature-related Financial Disclosures (TNFD), established in 2021, and the Network for Greening the Financial System have recently highlighted the importance of addressing these risks.
Despite growing concern, the financial impact of biodiversity loss has received limited academic attention. A recent study introduces the Corporate Biodiversity Footprint (CBF), a metric that assesses the impact of a company’s activities on biodiversity. Developed by Iceberg Data Lab, the CBF measures biodiversity loss across a company’s entire value chain, considering factors like land use, greenhouse gas emissions, and pollution.
The study analyzed data from over 2,000 firms across 34 countries between 2018 and 2021. It found that sectors like retail, wholesale, and food production, which involve intensive land use or pollution, have the highest biodiversity impacts. Interestingly, while companies with a large CBF might face higher transition risks, such as legal fines or compliance costs, the study suggests that these companies have only recently started to see these risks reflected in their stock returns.
Following significant biodiversity-related policy changes, such as the Kunming Declaration in 2021, companies with larger biodiversity impacts experienced a drop in stock prices, indicating that investors are beginning to price in the risks associated with biodiversity loss. The study concludes that as regulatory uncertainty increases, investors are likely to demand higher returns from companies with significant biodiversity footprints, anticipating future regulations that could impact their profitability.
Read the article by Harvard Law School
Authors Zacharias Sautner is a Professor of Sustainable Finance at the University of Zurich. This post is based on a recent article forthcoming in the Review of Finance by Professor Sautner, Professor Alexandre Garel, Professor Arthur Romec, and Professor Alexander F. Wagner.
