Pricing Biodiversity Risk: The Role of Investor Attention Dynamics.

This paper investigates whether and how firm-level biodiversity risks are reflected in equity markets and analyzes the role of investor attention in shaping the pricing of these risks. We distinguish between two forms of biodiversity exposure: impact risks, arising from firms’ adverse effects on ecosystems, and dependency risks, linked to firms’ reliance on ecosystem services. In theory, both sources of exposure should generate systematic risk premia or sustainability preference premia, yet existing empirical evidence provides only mixed support for either mechanism. We propose instead that variation in investor attention to environmental topics plays a central role in how biodiversity risks enter asset prices.
Using firm-level biodiversity and climate risk metrics from Iceberg Data Lab, we construct hedge portfolios on the biodiversity and climate risks, applying several portfolio formation strategies and evaluating both raw and risk-adjusted returns. To capture investor attention, we build several Google search-based indices for biodiversity and climate-related topics. We examine the short-run influence of attention on the portfolio returns and also study the long-run dynamics between attention and portfolio performance using cointegration methods. This dual perspective allows us to assess whether rising environmental attention signals a structural shift in investor preferences toward green assets.
Our portfolio results show that firms with higher biodiversity and climate risks consistently underperform on a risk-adjusted basis. High-risk portfolios also exhibit substantially larger tracking errors, indicating greater uncertainty, whereas low-risk portfolios deliver more stable and predictable returns. These patterns are more consistent with a demand-driven mechanism, where investors bid up low-risk stocks, than with compensation for bearing environmental risk.
The cointegration analysis reveals a stable long-run equilibrium between climate attention and green asset performance: increases in attention predict future green-over-brown outperformance, while feedback from returns to attention is weaker. Overall, our findings support an attention-based explanation for the pricing of environmental risks.
To our knowledge, this is the first study to document a feedback mechanism between shifts in biodiversity attention and corresponding asset-price movements.