Nature and the Markets

The loss of biodiversity is not only an environmental threat, but also a potentially significant factor for financial markets, potentially influencing commodity prices and returns. A new study published in the Review of Finance, authored by Massimo Guidolin and Manuela Pedio of Bocconi, documents the existence of a biodiversity risk premium: commodities with greater impacts on ecosystems have higher returns over time.

A premium for ‘nature’ risk

The main finding of the study is clear. Using highly granular data from the Joint Nature Conservation Committee (JNCC) on species losses per unit of cultivated land, the authors show that agricultural commodities with a higher impact on biodiversity — such as coffee, cocoa, oil palm, bananas, and rubber — achieve on average monthly returns between 20 and 60 basis points higher.

This means that the market is already incorporating the fact that these products are exposed to increasing risk: new regulations, consumer pressure, trade restrictions, traceability requirements.

 “Biodiversity is not just an ethical or reputational issue,” summarizes Massimo Guidolin, professor of finance at Bocconi. “It is a measurable financial risk that investors are beginning to price in. Higher returns reflect the fact that these assets are more vulnerable to the transition towards sustainable production models.”

The immediate reaction after the Kunming Declaration

Further validation of the main finding of the research is provided by the event study, which measures how commodities with a high impact on biodiversity reacted to the Kunming Declaration of October 2021. That declaration represented the first strong global political commitment to reduce nature loss by 2030.

The results are clear:

• in the month following the declaration, commodities with greater exposure to transition risk recorded abnormal negative returns of as much as -3.6%;
• conversely, those less exposed to transition risk did not experience significant changes.

“This dynamic is consistent with repricing,” explains Guidolin. “When a credible regulatory threat emerges, markets immediately reconsider the value of the most exposed products.”

The placebo test on COP21 in Paris—which concerned climate but not biodiversity—confirms the picture: no effect was observed there, a sign that markets can tell the difference between climate risk and nature risk.

An impact different from climate’s. And more difficult to manage

One of the most significant scientific contributions of the paper is to demonstrate that biodiversity risk does not coincide with climate risk:

• variables related to total deforestation or CO₂ emissions do not explain returns as much as the intensity of species loss per hectare;
• commodities that emit a lot but do not affect biodiversity hotspots do not imply the same “risk premium.”

The factors that measure how much commodity production affects species loss vary dramatically from country to country: in tropical regions, where ecosystems are richer and more fragile, the same converted hectare generates a much higher impact than in other areas of the world. It is precisely this strong heterogeneity—and the regulatory risk that comes with it—that the market has begun to price in. “Biodiversity is local, not fungible,” Guidolin points out. “This is why the transition risk on these assets is harder to manage: compensating elsewhere is not enough, and the markets understand this.”

The surprise on futures

Guidolin and Pedio’s study also studies the agricultural futures market. Here, the biodiversity risk premium is not statistically or economically significant. But this is due to a technical reason, not because there is no risk. Futures, in fact, mainly reflect convenience yield and hedging balances, while biodiversity risk — as shown by the theoretical model — is mainly “offloaded” onto spot prices.

Biodiversity as a systemic risk factor

These results are confirmed when we look at systemic risk: using a composite indicator of global biodiversity (constructed by WWF-LPI and IUCN-RLI), the authors document that commodities most sensitive to biodiversity loss shocks

• earn more in the long term,
• generate an average annualized abnormal return of 5.4% in a long/short strategy.

This further supports the idea that nature risk is no longer an invisible externality: it is a market risk factor. “Finance can no longer ignore biodiversity,” concludes Guidolin. “Those with exposure to assets that depend on fragile ecosystems need to know that they are taking on a real risk, with a direct impact on long-term returns.”

The paper’s final message is quite evident: the ecological transition is not just about emissions and carbon pricing. Biodiversity is set to become the new frontier of regulation — and the market is anticipating this.