Does Biodiversity Risk Matter to Capital Markets? New Evidence from China

This paper develops macro-, meso-, and firm-level measures of biodiversity risk specific to China and examines how corporate biodiversity risk exposure relates to stock returns. Using textual analysis of annual reports, news media, and search engine data for Chinese listed firms from 2000 to 2023, we find that aggregate attention to biodiversity has risen sharply. Contrary to a standard biodiversity risk premium hypothesis, higher firm-level biodiversity risk exposure is associated with lower realized stock returns, especially when aggregate biodiversity attention increases. High biodiversity-risk stocks experienced significant price declines following the Paris Agreement and Kunming Declaration. A portfolio of stocks with low biodiversity risk yields positive abnormal returns relative to stocks with high risk, and institutional ownership is lower in high-risk firms. The effect of biodiversity risk is distinct from other environmental risks. Our findings suggest that biodiversity risk is an emerging priced risk in China’s capital market driven by shifting investor attention, rather than a persistent positive risk premium. The implications for ethical significance of business practice is that capital-market pricing of biodiversity risk can reinforce the moral incentives for firms to manage their ecological footprint.