Biodiversity and stock returns

This study constructs the Biodiversity Risk (BR) index to investigate the impact of biodiversity risk challenges on financial markets. In this study, biodiversity risk is defined as the concern for risks to biodiversity and the associated negative impacts. The findings indicate that, both in- and out-of-sample, the BR index demonstrates robust predictive ability for the market risk premium. Moreover, the BR index contributes significantly to the asset allocation of mean-variance investors, yielding notable economic benefits. This study reveals industry heterogeneity in the impact of biodiversity on stock returns. Furthermore, the index demonstrates stronger predictive power for stocks in regions with larger nature reserves, non-state-owned enterprises, and high GDP. Additionally, this study quantifies biodiversity physical risk and transition risk for the first time, showing that physical risk significantly affects stock returns, but the impact of transition risk has yet to materialize.