There is no indication that global stock markets have priced in risk from corporate biodiversity footprints in recent years, but that has begun to change after the high-profile UN summits in Kunming and Montreal, a study has found.

In the first three days after world governments in Oct. 2021 issued the Kunming Declaration, calling on all nations to urgently protect biodiversity through their domestic decision-making, global companies with a large corporate biodiversity footprint (CBF) saw their stock value drop by about 0.5%, according to a study recently published by the Swiss Finance Institute.

That was noteworthy, because in the years prior to that event, researchers were unable to find any sort of link between stock market pricing and biodiversity footprint – not for companies, not for sectors, and not for countries.

Then, after COP15 in Montreal ended with the new Global Biodiversity Framework (GBF) in Dec. 2022, stock market data again showed a response, although the negative reaction this time was directed at companies located in countries with inadequate biodiversity protection.

“This response is consistent with investors revising their valuation of these firms downward upon the prospect that regulations to preserve biodiversity will become more stringent,” said the researchers, led by Alexandre Garel of the Audencia Business School with participation also from the Toulouse Business School, Frankfurt School of Finance & Management, and the University of Zurich.

Should the trend persist as national governments get on with the job of fleshing out national biodiversity strategies to meet their GBF goals and impose various reporting requirements and potential target-setting practices, that might push investors to demand higher returns before they invest in companies with large biodiversity footprints, or hold back their investments altogether.

“Notably, we find a significant negative stock price reaction to the Montreal agreement for firms located in countries with low levels of protection for biodiversity,” the report said.

“The effects are particularly strong for firms with a large biodiversity footprint related to land use, which is plausible, given that the Montreal agreement’s 30×30 target is most relevant for firms with large land-use related biodiversity impacts.”

Audencia Business School’s Garel told Carbon Pulse that the team is currently investigating whether there has been a reversal afterwards, but said the findings were noteworthy either way.

“Even if we consider a short window – a couple of days after the announcement of the Kunming Declaration, for instance – the market reaction we observe, ie. a decrease in the market value of high-CBF stocks relative to low-CBF stocks, should be based on what investors expect to happen in the coming years,” Garel said.

Such expectations would involve stronger regulation on biodiversity impact, greater awareness in society and among consumers on biodiversity loss, he added.

“Our understanding so far, based on the data at hand, is that the market reaction we observe is not driven by sentiment, but more by fundamentals.”

THE CBF

The study also introduced a new proprietary measure of company impacts on biodiversity, tagged the Corporate Biodiversity Footprint (CBF) by Iceberg Data Lab, the firm that developed it.

Using accessible data, the CBF takes into account companies’ impact on biodiversity loss from their land use, greenhouse gas emissions, water pollution, and air pollution.

The results are expressed as “km2 MDA” (mean species abundance), where an MDA of 100 km2 can reflect the total loss of biodiversity in a 100 km2 radius, a 10% loss within a 1,000 km2 radius, and so on.

It also borrows from the carbon emissions data playbook in that it separates Scope 1, 2, and 3 CBF. In doing the study, the researchers found that – just like in carbon – the downstream supply chain impact of company products account for by far the greatest harm to biodiversity, with 81% of the total.

They also found that firms from Finland, Brazil, and Germany, and in the retail and wholesale, paper and forest, and food sectors record the highest average biodiversity footprints.

While some of the corporations covered by the study may be small and have a low total CBF despite a high CBF intensity, the study found that market responses – especially in the aftermath of the Montreal meeting – were directed at those with a high total CBF, whereas intensity was largely ignored.

By Stian Reklev – stian@carbon-pulse.com

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