The Biodiversity Premium
31 Pages Posted: 26 Jun 2023 Last revised: 6 Feb 2024
Date Written: February 05, 2024
Abstract
Focusing on biodiversity risks, we perform an empirical asset pricing analysis and document three main results. First, the factor going long on low biodiversity intensity assets and short on high biodiversity intensity ones as well as the factors based on the biodiversity intensity subcomponents (land use, greenhouse gases---GHG, air pollution, and water pollution) have heterogeneous dynamics but are not spanned by the Fama-French and carbon factors. Second, the biodiversity factor excluding the GHG subcomponent (ex-GHG) commands a positive risk premium on realized returns and a negative one on expected returns in the sector highly exposed to the double materiality of biodiversity risks (i.e., physical and transition risks). Third, we show that the negative premium of both the biodiversity and the ex-GHG biodiversity factors on expected returns has materialized strongly from 2021 onwards and that it amplifies with attention to biodiversity issues and risk aversion.
Keywords: Biodiversity, Corporate Biodiversity Footprint, Stock returns, Asset pricing, Risk Premium
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