A recently published paper by a group that includes IFB Partner, Professor Ben Groom (Dragon Capital Chair in Biodiversity Economics at the Department of Economics, University of Exeter), considers the impact of Environmental, Social and Governance (ESG) biodiversity ratings on asset prices.
The study evaluates the impact of biodiversity components in ESG ratings on investment decisions, biodiversity outcomes, and nature-related risk management. It finds that biodiversity ratings have minimal correlation with firm characteristics, except for firm size, and do not predict stock returns.
Operating performance, including return on assets and profit margins, remains unaffected by biodiversity ratings. Systematic and idiosyncratic risks, as well as firm valuation, are also not influenced by these ratings, though increased biodiversity exposure raises systematic risk. The effect varies by industry: negative returns are observed in metals and mining, while positive returns are seen in utilities.
Institutional investors and analysts generally disregard biodiversity ratings in their decisions. Overall, the study suggests that current biodiversity measurements in ESG ratings offer limited additional value for financial decision-making and do not significantly contribute to biodiversity recovery or nature risk management.
You can download the paper here.