Biodiversity transition risk in capital markets: Evidence from European short sellers

This study examines how institutional investors respond to biodiversity risk, both physical and transition risks, by analyzing whether they increase (decrease) short positions in firms with greater exposure to biodiversity-related shocks. Using a European daily short-selling dataset covering 19 countries from 1st January 2021 to 31st December 2024, and a difference-in-differences (DiD) approach, we investigate how short-selling activity changes around 15th Conference of the Parties (COP15) to the United Nations Convention on Biological Diversity (CBD). COP15 the United Nations Biodiversity Conference, took place in Montréal, Canada, from December 7 to 19, 2022, resulted in issuance of a global framework and an agreement to conserve 30 percent of lands and oceans by 2030. Biodiversity risk exposure is measured by classifying firms as high-risk, taking value 1, if they operate in industries identified by financial professionals as having substantial biodiversity risk exposure, and zero otherwise. We separately analyze exposure to physical and transition biodiversity risks.

We find that short-selling by institutional investors increases significantly after COP15 for firms operating in high transition-risk industries, whereas no significant effect is observed for firms exposed to physical biodiversity risk. This indicates that financial markets interpret COP15 primarily as a regulatory shock rather than a change in physical biodiversity risk. The estimated coefficient on the interaction term (High Transition Risk × post-COP15) is 0.00139, meaning that high transition-risk firms experience on average a 0.14% increase in net short positions relative to low-risk firms. In our sample, the mean value of the net short position is 0.84% and this effect represents an increase of about 16.5% relative to that mean, which is economically meaningful. Overall, the results of this study highlight that biodiversity-related global agreements like COP15 have increased awareness and generated a significant shift in how investors view future biodiversity-related regulation, inciting them to take short positions to sectors expected to face higher compliance costs or tighter scrutiny related to biodiversity concerns.