A novel nature-based risk index: Application to acute risks and their financial materiality on corporate bonds

Abstract

In this paper, through the reaction of corporate bonds, we investigate the relationship between biodiversity and companies. With a focus on acute events, we measure biodiversity loss as a risk. After introducing a novel news-based metric to track biodiversity risk and identify key acute episodes we propose an event study to measure the market effect of acute biodiversity events on the spreads of Brazilian corporate bonds. To our knowledge, this is the first paper to investigate the linkages between acute biodiversity events and micro-level security pricing. We show that most of the studied events appear to be priced into the corporate bond market segment linked to biodiversity impact, establishing financial dependency within the double materiality principle. In fact, in the 2019–2022 period, companies in biodiversity impacting sectors saw their corporate bond spreads widen in the wake of acute biodiversity events. Our analyses indicate that the investor community’s growing awareness of biodiversity issues is also justified given its integration in price discovery.