Johannes Stroebel and Caroline Flammer discuss the correlation between biodiversity risk and asset prices, intergovernmental mechanisms for biodiversity protection, assessing the value of biodiversity investments, and the twin crises of climate change and the loss of natural capital.
Biodiversity loss poses physical and transition risks to firms, impacting asset prices.
Biodiversity finance harnesses private capital to protect and restore biodiversity, but effective public policies are necessary to address the crisis.
Deep dives
The Importance of Biodiversity
Protecting biodiversity is critically important for the planet, human health, and the world economy. The decline of species and the interconnectedness of the climate and biodiversity crises necessitate addressing biodiversity to combat climate change. Additionally, over 50% of global GDP is dependent on nature and ecosystem services.
Biodiversity Risk and Asset Prices
Biodiversity loss poses physical and transition risks to firms. Firms that use biodiversity as an input, like agriculture, are negatively affected by biodiversity loss. Similarly, firms whose activities impact biodiversity, like the shipping sector, are exposed to transition risks. Studies show that asset prices are influenced by negative news about biodiversity risk realizations, indicating that biodiversity risks are reflected in asset prices.
Measuring Biodiversity Exposure
Measuring biodiversity exposure to assess asset pricing is challenging but can be done in two ways. The first approach involves analyzing firms' self-declared risk exposures in their financial statements. The second approach involves surveying investors to elicit their perceptions of industries exposed to biodiversity risks. These approaches help identify industries and firms most affected by physical and transition risks.
Biodiversity Finance and Private Capital
Biodiversity finance harnesses private capital to protect and restore biodiversity. By bundling nature as a public good with private goods, financial returns can be achieved. For example, farms engaging in regenerative agriculture can increase their produce's value, and protecting forests can enhance ecotourism. Biodiversity finance attracts private capital by de-risking and subsidizing investments through blended finance, combining public and private funding. However, private capital alone cannot be a substitute for effective public policies in addressing the biodiversity crisis.
Climate change will have an impact on the natural environment, and the natural environment will affect the rate of climate change. Is biodiversity risk reflected in asset prices? Is it possible to use private capital to finance biodiversity conservation and restoration, and what can that achieve? Alissa Kleinnijenhuis and Tim Phillips talk to Johannes Stroebel and Caroline Flammer.
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