Biodiversity Risk - Stefan Giglio - ASWQ V3I2 - March 2025

Biodiversity, or species diversity, is essential to economic systems but has been understudied in finance. The study classifies biodiversity risk into physical (direct loss, e.g., food and pharma dependency) and transitional (regulatory or consumer-driven responses). A survey of nearly 700 financial professionals revealed broad concern over biodiversity risk, with many expecting its impact within the next decade. To test market awareness, the researchers built a biodiversity news index using machine learning on New York Times articles and analyzed firms' biodiversity exposure using 10-K filings, expert rankings, and fund holdings. Their hedge portfolio long low-risk, short high-risk firms showed a strong correlation with biodiversity news, indicating that markets do price biodiversity risk, even if imperfectly. This research is a first step in developing tools to measure and manage biodiversity-related financial exposures.