Hedging the Heat with Nature: How Forests Create Firm Value

Global deforestation has reached unprecedented levels, with more than 10 million hectares of forest lost every year. This rapid decline threatens climate stability, biodiversity, and economic activity by degrading vital ecosystem services. Yet despite the scale of these risks, we still know little about the concrete economic benefits forests provide to firms or how to credibly measure them, limiting both policy and private-sector conservation efforts. Forest cover is spatially non-random and evolves gradually, posing challenges for causal identification. Moreover, links between forests, carbon sequestration, and climate outcomes unfold over long horizons through complex ecological processes.

In this paper, we provide the first causal evidence that forests generate material economic value for firms. Our investigation proceeds in two steps. First, we exploit exogenous variation in prevailing wind patterns over 1985–2024, together with geographic heterogeneity in U.S. forest cover, to identify the causal effect of forest proximity on local summer temperatures. We find robust evidence that forests substantially reduce heat exposure—both locally, through evapotranspiration and shading, and more than 100 km downwind, as prevailing winds transport cooler, moisture-enriched air to nearby regions while leaving upwind areas unaffected.

In the second step, we examine how these temperature reductions translate into firm value. Focusing on U.S. manufacturing firms, we test whether proximity to forested areas—particularly those located upwind—enhances operational efficiency, both economically and environmentally. We study whether forests increase firms’ revenues and operating profits and reduce plants’ emission intensity, consistent with heat mitigation easing production constraints and lowering cooling needs. Finally, we investigate whether financial markets value the risk-mitigating benefits of surrounding natural ecosystems or instead respond indirectly through improved firm fundamentals.

Overall, our results show that forests provide a natural hedge against extreme heat, with measurable and economically significant effects on firm operations and financial performance. The findings carry important implications for conservation policy and for private investments in nature-based climate solutions.