Biodiversity Risks and Corporate Investment

Using firm-level measures of biodiversity risk exposure extracted from firms’ 10-K statements with textual analysis; the first study, I document a strong adverse association between corporate investment and biodiversity risks (BDR) including i) total count, ii) negative, and iii) regulation-driven measures. More importantly, in line with the life-cycle theory, the relation is pronounced for larger and more mature firms, suggesting that firms with less growth opportunities care more about climate-induced risks, BDR exposures in this case. When environmental policies become more stringer for climate actions, the study empirically supports the rationale that climate-induced uncertainty can depress capital expenditure due to investment irreversibility, causing precautionary delays for firms. The findings hold up with the quasi-experimental design with difference-in-differences (DID) estimation results and tested channels, documenting the treatment effects of Paris Agreement (COP21) on the association between firm-level biodiversity risks and corporate investment. With comprehensive data on US firms for the period 2000-2022, endogeneity issues are mitigated with the DiD estimators when the study excludes the Covid-19 pandemic between treatment and control groups before and after COP21. Given the novelty, the findings contribute to the links between climate-induced risks and markets for future financial research streams in the climate change era.