Biodiversity Risk in the Corporate Bond Market

Abstract

We investigate how risks associated with biodiversity loss influence borrowing costs in the US corporate bond market. Using a market-based measure of biodiversity risk for firms, we find that higher biodiversity risk exposure is associated with higher yield spreads among long-term bonds, indicating biodiversity as a long-run risk. This effect is stronger among riskier firms and firms that mention biodiversity, particularly biodiversity regulation, in their financial statements. Using the adoption of the Kunming-Montreal Global Biodiversity Framework as an experiment, we find that the impact of biodiversity risk on yield spreads is more pronounced when biodiversity-related awareness and regulatory risks rise.

Keywords: Biodiversity Risk, Climate Change, Corporate Bonds, Cost of Capital, Yield Spread

JEL Classification: G12, G18, G32, Q54