The Pricing of Biodiversity Risk in Commodity Markets

This paper provides empirical evidence that biodiversity-related transition risk is priced in global commodity markets, with particular emphasis on agricultural commodities. Using intensity-based metrics of species loss per harvested land unit, we obtain empirical evidence that commodities with higher biodiversity footprints earn significant risk premia, after controlling for commodity-specific factors. An event study around the Kunming Declaration further shows that commodities associated with greater biodiversity risk experienced negative abnormal returns following the declaration. In an aggregate-level analysis, we additionally find that commodities with higher sensitivity (beta) to biodiversity shocks earn significantly higher excess returns, reinforcing the presence of a biodiversity-related risk premium across global commodity markets. Our findings suggest that investors are increasingly internalizing the biodiversity-related risks at the commodity-asset level. The findings can be rationalized by a commodity production model, which we outline in Section 5.