The pricing of biodiversity risk in commodity markets

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

Overview

Biodiversity loss is accelerating worldwide and increasingly recognised as a source of financial risk. ‘The Pricing of Biodiversity Risk in Commodity Markets’ provides one of the first systematic analyses of how biodiversity-related shocks affect commodity price dynamics, risk premia and investor exposure. Using a granular, open-access database to construct a commodity-level biodiversity footprint measure, and integrating it with state-of-the-art asset pricing methodologies, the authors demonstrate that biodiversity risk is empirically identifiable, systematically priced, and economically significant in commodity markets. The findings create an essential evidence base for investors, regulators and risk managers seeking to understand how nature loss interacts with global markets.

An interview with Manuela Pedio.

Authors

Massimo Guidolin

Bocconi University and Baffi CAREFIN Centre

Manuela Pedio

University of Bristol and Baffi CAREFIN Centre

Project aims

The research aims to bridge a critical gap: although biodiversity is tightly linked to the production of key natural-resource commodities, no empirical work has attempted to quantify how biodiversity-related shocks affect commodity returns.

To address this gap, the study pursues 4 main objectives:

1

Granular commodity-level biodiversity data

Use a granular dataset that accounts for the ecosystems in which agricultural commodities are grown to compute a commodity-specific biodiversity footprint.

2

Biodiversity risk and commodity returns

Quantify how this commodity-specific biodiversity footprint relates to commodity returns, both cross-sectionally and over time.

3

Transmission channels from biodiversity to markets

Test the transition risk vs. physical risk channels through an event study around the Kunming Declaration.

4

The impact of the exposure to aggregate biodiversity shocks

Assess whether commodities with higher sensitivity (beta) to biodiversity shocks earn significantly higher excess returns.

Their overarching goal is to determine whether biodiversity risk is priced in commodity markets in a manner comparable to climate-risk pricing documented in the related literature.

Key insights

1

A granular dataset that allows for the computation of a commodity-level biodiversity footprint

The authors construct an intensity-based metric of species loss per harvested land unit, using the open-source granular dataset assembled by the UK Joint Nature Conservation Committee (JNCC).

2

Biodiversity risk is priced in commodity markets

A central finding is that commodities with higher biodiversity exposure earn higher risk premia when biodiversity risk rises, demonstrating clear evidence of pricing effects. Agricultural commodities with higher biodiversity footprints earn a premium ranging between 20 and 60 basis points per month.

3

Biodiversity risk operates through regulatory channels

The study corroborates transition risk through an event study around the Kunming Declaration in 2021. Commodities with high biodiversity footprints experienced significantly negative abnormal returns immediately following the declaration, consistent with markets repricing transition risk.

4

Biodiversity risk is distinct from climate risk

While nature loss and climate change are interlinked, the research demonstrates that biodiversity risk captures independent information not explained by climate-risk indices, nor other traditional commodity factors. This means investors cannot rely solely on climate metrics; biodiversity contributes unique and additional sources of market risk requiring separate assessment.

Why this matters for investors

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Biodiversity loss is a material risk factor

The research provides robust empirical evidence that biodiversity risk is not an abstract environmental concern: it directly affects financial returns in large and liquid global markets. This elevates biodiversity to a core consideration for investors with commodity holdings, supply-chain exposure or real-asset portfolios.

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Hedging and asset-allocation strategies need updating

Because biodiversity shocks move commodity prices, investors can enhance portfolio resilience by incorporating biodiversity risk exposure into:

  • risk-factor models
  • hedging programmes
  • strategic asset allocation
  • scenario analysis and stress testing

This is particularly important for investors with exposure to agriculture, food systems, natural resources and energy transition materials.

Decorative yellow dot.

Regulatory momentum will increase pricing effects

As biodiversity regulation expands, transition-risk impacts on commodities are likely to strengthen. Investors who integrate these risks early may better anticipate price shifts and avoid stranded-asset risks.

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Major opportunity for forward-looking investors

The fact that biodiversity risk is priced but still understudied means markets may not yet fully reflect long-term nature-loss dynamics. Investors capable of integrating biodiversity risk now may capture mispricing opportunities and strengthen long-term value creation.

Conclusion

This research demonstrates that biodiversity loss is a measurable and financially significant driver of commodity returns. By developing a measure of commodity biodiversity footprint, the study provides empirical evidence that biodiversity-related transition risks are priced in the commodity market. After the Kunming Declaration, commodities linked to greater biodiversity damage saw price drops, suggesting markets expect tighter environmental rules and demand higher future returns for these assets.

A comparison with the Paris Agreement shows this effect is specific to biodiversity (not general climate risk). For investors, these findings highlight the need to integrate biodiversity into risk models, hedging strategies and asset allocation to strengthen resilience in increasingly nature-linked markets.

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