Biodiversity risk, market valuation, and the moderation of ESG performance

This study investigates the relationship between corporate biodiversity risk and firm value. Biodiversity loss is increasingly recognized as a material financial risk, as it may affect firms through both physical disruptions and transition pressures (Flammer et al., 2025; Lucey & Vigne, 2025). Building on the sustainable investing framework of Pástor et al. (2021), firms with greater biodiversity-related vulnerabilities may experience lower investor demand for riskier or less sustainable firms and a corresponding increase in their cost of capital (e.g., Chen, 2025). These effects can impose financial burdens and limit strategic flexibility (e.g., avoiding short-term debt; see Duong et al., 2025), ultimately leading to lower firm value.

To examine these relationships, the study employs a comprehensive panel dataset of US firms covering the period 2015-2024. This period focuses on the post-Paris Agreement era, when attention to sustainability increased. Limiting the sample to these years also ensures that biodiversity-related disclosures are more relevant, consistent, and less affected by earlier data noise. The dataset includes company financial information, firm-level biodiversity risk, and ESG performance. Biodiversity risk is measured using the indicator developed by Giglio et al. (2025), which captures whether a firm is exposed to biodiversity-related risks in a given year. Firm valuation is assessed using standard financial metrics, Tobin's Q and the market-to-book ratio, constructed from LSEG Eikon. LSEG ESG ratings are utilized as a measure of the ESG performance in this research.

The results indicate that firms exposed to biodiversity risk exhibit, on average, lower valuation. Firms with stronger ESG performance experience a smaller decline in value, suggesting that strong sustainability practices can help reduce the financial impact of biodiversity risk. In contrast, the "biodiversity commitment" indicator from LSEG ESG metrics does not show a significant moderating effect. However, the data on this indicator is too limited to draw robust conclusions. Finally, the link between biodiversity risk and firm value becomes much weaker after 2021, in line with broader studies on sustainable investing, which show that the market's pricing of sustainability has been declining in recent years (Badía et al., 2020; Long et al., 2024; Vu et al., 2025).