Thought of the Week - The first really awesome biodiversity resource
Last year, I asked my readers to let me know if they had any good data on the relevance of biodiversity risk for investments. While I received lots of input from my readers, the input was usually company-specific and didn’t allow for a systematic analysis of biodiversity risks across companies. Furthermore, nobody could point me in the direction of any studies that showed biodiversity risk priced into markets. I said back then we were currently at the beginning of the journey. Now, it seems, we have taken a major step forward.
Stefano Giglio and his colleagues at NYU Stern have published a truly great paper that tries to quantify biodiversity risks for companies in different ways. One way they tried to quantify risks is by counting media articles that mention biodiversity issues. As the chart to the left shows, an article is now published almost every day that discusses biodiversity issues.
They also surveyed practitioners and academics for their views of biodiversity risks and which industries are most at risk from the decline in biodiversity. Finally, and this is where things get really cool, they scan 10-K documents and other company reports for discussions of biodiversity, either as opportunities, risks or regulatory issues. This allowed the authors to compare the risk from loss of diversity as perceived by investors and academics versus the risk as discussed in company filings. Take a look at the chart on the left that plots these two dimensions against each other.
There are clear mismatches between the perception versus the discussion of biodiversity risk. For example, surveys indicate that the food, beverage and tobacco industries have the greatest biodiversity risk (I would have said the same). But a fundamental analysis of risks discussed in company filings indicates that this sector isn’t all that exposed to biodiversity risk. Instead, retail companies, real estate and utility companies face higher risks from increased scrutiny and regulation of biodiversity. This seems to be a blind spot for investors right now.
Furthermore, the data the researchers collected allowed them to check whether share prices show any correlation with biodiversity risk. And here the evidence is still pretty weak. The correlation between share prices and media reports on biodiversity risk is still only about 0.1. Hence, biodiversity risks are barely priced in equity markets, if at all. But correlations can increase over time. After all, a decade ago, we hardly had any evidence that climate-change risks were priced in equity markets. Today, the evidence is pretty strong that they are.
And thanks to the research of Stefano Giglio and his colleagues we can now track progress in biodiversity risk exposure. And you know the best thing about all that? The researchers have made their data available free online. Their website biodiversityrisk.org is a must-have bookmark for every ESG investor. Check it out, it is truly awesome.
Thought of the Day features investment-related and economics-related musings that don’t necessarily have anything to do with current markets. They are designed to take a step back and think about the world a little bit differently. Feel free to share these thoughts with your colleagues whenever you find them interesting. If you have colleagues who would like to receive this publication please ask them to send an email to joachim.klement@liberum.com. This publication is free for everyone.
