Why biodiversity finance has become a big deal

Are markets already pricing biodiversity risk and if so, how? Early evidence is mixed but evolving.

In an earlier study ‘Do Investors Care About Biodiversity?’ researchers looked at a new metric, corporate biodiversity footprint and its relationship with equity returns. Across countries and time, they initially found no systematic return premium associated with biodiversity risk. Unlike carbon, biodiversity did not yet appear to be robustly priced. 

However, when they zoom into recent years and biodiversity-salient events, the picture changes: 

They find negative stock price reactions for companies with higher biodiversity footprints following key policy moments such as the launch of the Taskforce on Nature related Financial Disclosures (TNFD) in June 2021 and the Kunming Declaration in October 2021, which had sought to maintain momentum in biodiversity negotiations. 

In other words, markets do react to biodiversity risk when it is put under the spotlight. Investors have started to demand a risk premium as they anticipate future regulatory and reputational costs. 

Compared to well-studied carbon risk, biodiversity pricing is still patchy and inconsistent. This article highlights several reasons: 

• Regulatory frameworks are less developed for nature than for climate. 
• Exposure measurement is harder: biodiversity is multidimensional, spatially heterogeneous, and less standardised than carbon emissions. 
• Disclosure is much thinner. For instance, in 2022, 18,760 firms disclosed carbon emissions to CDP, versus 7,974 firms disclosing biodiversity data. In 2023, the numbers were 23,293 (carbon) vs 11,453 (biodiversity) disclosures. 

This imbalance makes it more challenging for investors to compare firms, construct risk measures, and price exposure. Nevertheless, the papers in the Special Issue collectively argue that biodiversity risk is moving in the same direction as carbon risk, just with a delay. 

An important innovation in the Special Issue is the use of large-scale surveys to understand perceptions of biodiversity risk. 

• The paper ‘Corporate Nature Risk Perceptions’ surveys international corporate managers on nature related risks. Nearly half view these risks as financially material, with many already seeing impacts. Managers cite biodiversity as an emerging concern, face varied stakeholder pressures, struggle with standardised metrics and often see shareholder engagement on nature as value enhancing. 

• In the paper, ’Biodiversity Risk’ researchers survey US financial market participants. Their findings show that about 70% of respondents believe that physical and transition biodiversity risks as financially material. Researchers find that portfolios with higher biodiversity risk exposure earn higher returns when related news arises.  

This evidence indicates biodiversity is increasingly recognised as a priced risk factor, with markets and investors responding to biodiversity information. 

Two papers in the Special Issue deepen the analysis at the level of individual firms and establishments.

• ‘FirmLevel Nature Dependence’ introduces firm-level metrics capturing how dependent a company is on local ecosystem services. It demonstrates high nature dependence is linked with greater downside risk and more frequent nature related ESG incidents. These metrics provide a more granular lens than simple sector classification, allowing investors to identify vulnerable firms within the same industry. 
• In ‘The Real Effects of Protecting Biodiversity’ paper, researchers focus on regulatory interventions that create new protected areas. The study finds that firms close to newly protected areas reduces toxic emissions by 50%, mainly by scaling back operations rather than adopting cleaner technologies, highlighting a trade-off between environmental benefits and potential constraints on local economic activity. 

Putting these studies together, the Editors argue that nature risks are financially material at the firm level and that both physical and transition risks can have clear, measurable financial consequences. 

For practitioners, there is a call for standardised, globally integrated data on firm-level biodiversity dependencies and exposures, enabling: 

• comparability across firms and regions,
• better integration into risk models, credit analysis and stewardship
• research into the causal channels through which biodiversity affects firm performance. 

The next group of papers explore how biodiversity influences asset prices, from commodities to housing: 

Systematic risk in commodity markets

In ’The Pricing of Biodiversity Risk in Commodity Markets’, researchers construct a biodiversity risk factor for global commodity futures, based on data linking production processes to species loss and habitat degradation. They show that commodities with greater exposure to biodiversity-intensive production earn higher expected returns, even after adjusting for standard risk factors (momentum, volatility, macro sensitivity). 

The interpretation of these findings is that investors demand compensation for holding assets tied to biodiversity degradation. Biodiversity loss behaves like a priced systematic risk factor, similar to carbon transition risk in climate finance. 

Biodiversity and local asset values

In ‘Biodiversity & Local Asset Values’, researchers bring the analysis down to local real assets, focusing on US property markets. They found that areas with higher biodiversity command persistent price premia in residential and commercial real estate. 

Biodiversity functions as a valued local amenity and signal of environmental quality, directly capitalised into land values. This is microlevel evidence that nature has measurable economic value in everyday markets.

Resilience channel in coastal housing

In ‘Financial Value of Nature: Coastal Housing Markets, Mangroves and Climate Resilience’ the focus shifts to coastal housing, mangroves and climate resilience.

Using a difference indifferences design, researchers compare post-storm price dynamics between houses near intact natural defences (wetlands, dunes, mangroves) and houses in degraded areas. 

Properties in areas with intact ecosystems suffer smaller post-storm price declines, implying that biodiversity offers insurance like protection against climate shocks.

Taken together, the Editors argue that these 3 papers 3 distinct channels through which biodiversity affects asset values: 

1. Systematic risk channel: biodiversity-intensive production earns higher risk premia (commodities). 
2. Local capitalisation channel: biodiversity increases the value of proximate assets (real estate). 
3. Resilience channel: biodiversity reduces sensitivity to environmental shocks (coastal housing). 

For investors, the message is powerful: biodiversity is not just a negative screen, it is a driver of risk, return and resilience across portfolios. 

A central question is whether financial flows that are explicitly targeted at biodiversity achieve ecological outcomes. 

How effective is public funding?

‘Does Financing Biodiversity Reduce Biodiversity Loss’ analyses over 8,000 publicly funded projects (€11.5bn globally) over two decades. It finds that conservation projects improve forest cover but have limited impact on species level biodiversity, research projects mainly expand data with diminishing returns, and some biotech projects generate monetisable IP.  

Overall, public funding improves certain indicators, yet its impact on reducing extinction risk is limited, highlighting a complex and often disappointing link between spending and biodiversity outcomes.

Biodiversity entrepreneurship and private ventures

In contrast, ’Biodiversity Entrepreneurship’ turns to private-sector entrepreneurship. By identifying 630 biodiversity linked startups worldwide and constructing matched samples of otherwise similar non-biodiversity ventures, they find biodiversity startups raise less capital and smaller deals than comparable ventures, reflecting monetisation challenges. However, they attract diverse investors via blended finance. Strong social media presence boosts funding, highlighting communication’s role. Biodiversity start-ups span diverse ecological focus areas.

Taken together, the public funding and entrepreneurship studies suggest: 

• There is no single, one-size-fits-all financial solution to biodiversity loss. 
• Large public programmes can move broad indicators like forest cover but often fail on more demanding metrics of species integrity and extinction risk. 
• Entrepreneurial, bottom-up ventures can innovate and mobilise new capital but currently operate with smaller deal sizes and constrained business models. 
• The design of financing instruments must be tailored: what works for forest conservation may not suit genetic diversity or information-based interventions. 

For practitioners, this points to the importance of blended finance, investor heterogeneity, and strong storytelling / communication to align commercial and conservation objectives. 

The last group of papers in the Special Issue addresses ’carbon markets’, a key existing channel through which biodiversity funding is often provided in the form of ‘co-benefits’. 

Do biodiversity co-benefits materialise on the ground?

In the project on ’Biodiversity Co-Benefits in Carbon Markets’, the authors analyse 1,730 nature based carbon offset projects (2000–2023) and find no consistent biodiversity gains and an average 3.7% increase in habitat pressure. The results reveal a gap between claimed co-benefits and actual ecological outcomes, raising concerns about transparency and governance. 

How do investors react to credible biodiversity certification?

In ’Do Investors Care about the Rainforest?’ researchers explore the investor side. They study voluntary carbon credits certified under the Climate, Community & Biodiversity (CCB) Standard, which bundles measurable biodiversity and community benefits with carbon offsets. 

Using announcements of forestry carbon offset retirements (2009–2024) made by publicly listed companies, they measure investor reaction. They find that CCB-certified credits are rewarded more by the market, especially when public scepticism about carbon offsets is high.

Putting these 2 papers together the editors state that: 

• On the ecological side, many carbon offset projects do not deliver the biodiversity gains they promise. 
• On the financial side, markets reward credible biodiversity certification, especially when offset integrity is under scrutiny. 

This underscores the need for robust standards, verification, and alignment of financial signals with real ecological impact in voluntary carbon and nature markets.