Biodiversity risk

Centre for Endowment Asset Management (CEAM)
Centre for Endowment Asset Management (CEAM)

Overview

This project investigates whether biodiversity-related physical and regulatory risks affect financial markets, how these risks can be measured and whether they are reflected in asset prices.

The authors develop the first comprehensive framework to quantify biodiversity risk exposures across industries and firms and they provide new evidence that biodiversity risk is already partially priced in equity markets.

An interview with Johannes Stroebel.

Authors

Stefano Giglio

Yale School of Management

Theresa Kuchler

NYU Stern

Johannes Stroebel

NYU Stern

Xuran Zeng

NYU Stern

Project aims

The researchers examine how biodiversity loss, defined as the decline in diversity of  species and ecosystems, creates risks for companies and investors. The study is organised around 4 primary objectives:

1

Aggregate news-based biodiversity risk index

Develop a market-wide biodiversity risk index using sentiment-classified coverage from The New York Times.

2

Firm- and industry-level exposure measures

Construct measures of biodiversity risk exposure at the firm and industry level by combining text analysis of 10-K filings, holdings of biodiversity-focused investment funds, CDP disclosures and evidence from a global survey of finance professionals, regulators and academics.

3

Pricing of biodiversity risk in equity markets

Assess whether biodiversity risk exposures covary with asset prices, indicating the extent to which biodiversity risk is priced in equity markets.

4

Perceived adequacy of biodiversity risk pricing

Document how market participants perceive the adequacy of current biodiversity risk pricing across financial markets.

Key insights

1

Biodiversity loss is a material economic risk

Biodiversity underpins essential ecosystem services, including pollination, water purification, soil fertility and natural disease regulation, that support trillions of dollars of economic value annually. Many sectors, from agriculture to pharmaceuticals, depend directly on these services. The loss of biodiversity therefore creates both physical risks (such as reduced yields, resource scarcity and emerging diseases) and transition risks (such as land-use regulations, habitat protections and shifts in consumer preferences). Survey results from 668 finance professionals and academics show substantial concern, as around 70% believe biodiversity risks are at least moderately financially material and about 20% believe these risks are already materialising. Transition risk is expected to surface earlier than physical risk.

2

A new aggregate biodiversity risk index

The authors develop the NYT-Biodiversity News Index, constructed by identifying biodiversity-related articles using a tailored dictionary and classifying sentiment with the BERT model. Negative news increases the index; positive news lowers it. The index spikes around:

  • changes to the Endangered Species Act
  • ecological disasters
  • major biodiversity policy announcements

The index behaves distinctly from climate-risk news, confirming that biodiversity and climate risks, while related, are separate phenomena.

3

Multiple new measures of firm-level exposure

The study develops 4 complementary biodiversity exposure metrics:

  • 10-K text-based exposures: identifies negative, neutral and positive biodiversity-related risk discussion; mentions have risen from approximately 1% of firms in early 2000s to approximately 5% by 2023.
  • survey-based exposures: respondents rank industries by vulnerability to physical and transition risks. Food, agriculture, energy, utilities and real estate score highest
  • fund holdings-based exposures: firms underweighted in biodiversity-focused Exchange Traded Funds (ETFs) are inferred to have higher biodiversity risk exposure
  • CDP-based exposures: scores rely on self-reported operations in biodiversity-sensitive areas.

4

Biodiversity risk is already reflected in equity prices

The authors build hedge portfolios that are long firms with low biodiversity exposure and short firms with high exposure. They find positive and significant correlations (up to 0.2) between hedge-portfolio returns and innovations in the biodiversity news index. This indicates that equity markets partially price biodiversity risk, comparable to climate-risk pricing documented in earlier literature. Importantly, biodiversity exposure cannot be replicated with common firm characteristics in the factor zoo, suggesting biodiversity risk captures unique economic information.

5

Market participants believe risks are underpriced

Despite evidence of partial pricing, about half of survey respondents believe biodiversity risks are not adequately priced in equities, commodities, sovereign debt, or real estate. Only 14–19% think markets price these risks correctly.

Why this matters for investors

The findings have major implications for long-term investors, asset managers and regulators:

Hidden risks

Biodiversity loss threatens asset values through supply-chain disruption, regulatory shocks and ecosystem collapse that cannot easily be offset by capital or labour.

Pricing opportunity

Because investors systematically underprice biodiversity risk, early movers may benefit from mispricing corrections as regulation ramps up.

Portfolio construction

Exposure varies significantly across industries, with energy, utilities, real estate, materials, food and pharma rank highest, enabling targeted risk management.

Strategic engagement

The research helps investors identify firms with unmanaged biodiversity exposure and supports stewardship on nature-risk disclosures.

Complement to climate analysis

Biodiversity is not captured by climate metrics; integrating both provides a more complete picture of nature-related financial risk.

Conclusion

This piece of research shows that biodiversity loss is a financially material and increasingly measurable risk, already partly reflected in equity prices. By creating new indicators and firm-level exposure metrics, the study reveals that market participants recognize the threat but still underprice it. Biodiversity risk behaves distinctly from climate risk, underscoring the need for separate analysis. For investors, the findings highlight both emerging vulnerabilities and opportunities, emphasizing that integrating biodiversity considerations is essential for resilient, forward-looking portfolio and risk management.

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