The Market Effect of Acute Biodiversity Risk: The Case of Corporate Bonds

Abstract

In this paper, we investigate the relationship between biodiversity and companies, through the lens of corporate bonds. We focus on acute biodiversity events and address biodiversity as a risk, considering its looming losses. We illustrate the material and tangible operational risk that may arise from biodiversity losses and propose an event study to measure the market effect of acute biodiversity events on Australian and Brazilian corporate bonds’ spreads. To our knowledge, this is one of the first papers to investigate the linkages between acute biodiversity events and micro-level security pricing. We show that most of the studied events appear to be priced into the corporate bond market segment linked to biodiversity impact. Our results indicate that on average, companies in the sectors that have the greatest impact on biodiversity have seen their corporate bond spreads widen in the wake of acute biodiversity events in the 2019-2022 period, providing empirical evidence of corporate financial effects triggered by biodiversity losses. We also illustrate the interlinkage between biodiversity, socio-economic and food systems. Our analyses indicate that the investor community’s growing awareness of biodiversity issues is also justified given its integration in price discovery.

Keywords: biodiversity, ecosystems services, ESG, asset pricing, corporate bonds, corporate sustainability, natural language processing, event studies, food security.

JEL Classification: G12, Q57, Q51