Biodiversity actions, investor reactions: The stock market impact of biodiversity initiatives

Using a novel dataset constructed through natural language processing of corporate sustainability reports, we examine how firms’ exposure to biodiversity risk drives their actions to conserve biodiversity and the stock market implications of such initiatives. We categorize initiatives into four types, Capacity building, Community engagement, Innovation strategies, and Operational strategies, based on whether they are internally driven, reputational or outcome-oriented, and expected to materialize in the short or long term.

Over half of the biodiversity initiatives that firms undertake are Community engagement (e.g., donations and funding), while climate-related initiatives are mainly Operational strategies, indicating that biodiversity action is less embedded in core operations due to measurement complexity, weak regulation, and limited integration into production and supply chains.

We first investigate whether firms with greater exposure to biodiversity risks are more likely to engage in biodiversity initiatives. Using a two-step Heckman selection model to account for the selection bias in sustainability reporting, we find that firms with larger biodiversity footprints are more likely to undertake such initiatives. The effect is strongest for capacity-building initiatives and primarily reflects reputational risk stemming from environmental controversies, while biodiversity dependency shows no significant effect.

Next, we analyze the stock market consequences of biodiversity initiatives. Panel regressions show no significant link between biodiversity initiatives and stock returns in the full sample or after the Kunming Declaration. However, using a stacked difference-in-differences design exploiting the staggered introduction of biodiversity-related taxes and fees across countries, we find that firms undertaking biodiversity initiatives earn higher returns after these policy changes. Moreover, markets respond more rapidly to visible, reputation-driven actions while recognizing the value of capacity-enhancing initiatives with delay.

We make several contributions. First, we provide evidence on how firms translate biodiversity risk exposure into concrete actions. Second, we extend the literature by shifting attention from risk exposure to firm-level initiatives. Third, we show that biodiversity-related taxes can amplify the market relevance of corporate action. Finally, to our knowledge, this is the first study to analyze how market reactions differ across types of initiatives based on their visibility and speed of impact.