Noisy Biodiversity: The Impact of ESG Biodiversity Ratings on Asset Prices

46 Pages Posted: 14 Aug 2023 Last revised: 25 Apr 2025

See all articles by Wei Xin

Wei Xin

University of Exeter Business School

Lewis Grant

Hermes Investment Management Limited

Ben Groom

University of Exeter

Chendi Zhang

University of Exeter Business School

Date Written: April 25, 2025

Abstract

The biodiversity components of ESG ratings are analysed to understand whether this disclosure mechanism can affect investment decisions, improve outcomes for biodiversity or lead to better management of nature-based risks. We analyse the relationship between stock returns and firms’ biodiversity ratings and how biodiversity ratings are related to firm characteristics. We conclude that biodiversity ratings are largely uncorrelated to firm characteristics other than via firm size, and do not predict stock returns. Analysis of operating performance sheds light on why: returns on assets and profit margins are not affected by biodiversity ratings. Systematic risk, idiosyncratic risk and firm valuation are also not influenced by overall biodiversity performance. The effect is heterogeneous across industries: biodiversity ratings predict negative returns in metals and mining but positive returns in utilities. Further, institutional investors and sell-side analysts ignore biodiversity ratings in their decision-making. A suite of tests suggests that biodiversity as measured in ESG ratings does not provide useful additional information for financial decision makers. It is difficult to see how, on its own at least, the measurement and disclosure of biodiversity via ESG ratings currently helps achieve any target related to biodiversity and nature recovery or improves the management of nature-based risks.

Keywords: ESG, Biodiversity, Nature, Disclosure, Finance, Asset Pricing, Risk

JEL Classification: G12, G14, G23, Q56, Q57

Suggested Citation

Xin, Wei and Grant, Lewis and Groom, Ben and Zhang, Chendi, Noisy Biodiversity: The Impact of ESG Biodiversity Ratings on Asset Prices (April 25, 2025). Available at SSRN: https://ssrn.com/abstract=4540722 or http://dx.doi.org/10.2139/ssrn.4540722

Wei Xin

University of Exeter Business School ( email )

Streatham Court
Exeter, EX4 4PU
United Kingdom

Lewis Grant

Hermes Investment Management Limited ( email )

Lloyds Chambers
1 Portsoken Street
London, E1 8HZ
United Kingdom

Ben Groom (Contact Author)

University of Exeter ( email )

Northcote House
The Queen's Drive
Exeter, Devon EX4 4QJ
United Kingdom

Chendi Zhang

University of Exeter Business School ( email )

Streatham Court
Xfi Building, Rennes Dr.
Exeter, EX4 4JH
United Kingdom

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