May 27, 2023Written by National Bureau of Economic Research

In this paper, a group of renowned financial scholars analyse the economic effects of biodiversity loss. Using a variety of data sources, the authors construct several measures of biodiversity risk exposure. The results suggest that while biodiversity risks are already shaping equity prices, there is a substantial “research gap” which may result in an underpricing of risks.

The study was written by Johannes Stroebel, Theresa Kuchler and Xuran Yeng of New York University and Sergio Giglio of Yale School of Management. Funded by the Volatility and Risk Institute, it states that research gaps are concerning as biodiversity services play a “fundamental role in the economy”.

Risks stemming from biodiversity loss can affect firms through many channels, calling for a precautionary approach. Recent losses of ecosystem services have been estimated to cause damages of US$4-20tn annually, according to estimates from JPMorgan which are referenced in the paper.

Biodiversity loss strongly affects financial stability, the authors say, due to society’s multifaceted reliance on its services. For example, diverse and healthy ecosystems are key to the production of food, raw materials and medicines, as well as resilience to disease and climate change.

This paper makes progress towards closing the research gap and provides a starting point for quantitative analysis. The authors develop a news-based aggregate biodiversity risk measure as well as several firm and sector-level risk measures which can be used to study the pricing of risks.

The authors conducted a large survey of financial professionals, regulators and academics and the results reveal a “broad and substantial” concern for biodiversity loss. Seventy percent of respondents regarded exposures as financially material, showing a forward-looking awareness of risks.

These findings are supported by the news-based aggregate of biodiversity risk which shows a consistent increase in the public perception of biodiversity risks over time.

Similarly, industry and firm-level measures show that self-reported exposures to biodiversity risks are increasing. These measures are based on analyses of firms’ 10-K statements, a large survey of the financial sector, and biodiversity fund holdings.

Findings also show that sources of risk and levels of exposure vary substantially across industries and that energy, utilities and real estate are the most exposed sectors.

The authors combine all the data sources with cross-sectional pricing information to construct a quantitative series to assess the pricing of biodiversity risks. While results show that risks are partly affecting equity prices, around 50% of survey respondents said that risks are underpriced in equity, stock, commodity and real estate markets (35% gave no opinion).

The authors state that this paper is intended to “facilitate more research on this important topic”. They say that future research should include an integrated study of biodiversity risk pricing across asset classes; a refinement of the different types of biodiversity risk (e.g. species vs. ecosystem diversity); and a deeper analysis of interactions with climate risk.

This page was last updated May 27, 2023

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