Biodiversity Reporting and Climate Policy Uncertainty

Biodiversity plays a crucial role in green and sustainable business; however, it has received less attention than climate change. In recent times, there has been a call for greater biodiversity reporting. However, there are contrasting views on the benefits of firms' biodiversity reporting. Although biodiversity reporting can enhance public perception of firms' environmental performance, it could potentially expose them to greater regulatory scrutiny and reputational risks. Uncertainty surrounding climate policy adds to the complexity of the trade‐off of biodiversity reporting. Motivated by this debate, we test two competing hypotheses on the effect of climate policy uncertainty (CPU) on biodiversity reporting: (1) CPU drives greater biodiversity reporting (CPU‐driven biodiversity reporting enhancement hypothesis) versus (2) CPU drives less biodiversity reporting (CPU‐driven biodiversity reporting restraint hypothesis). We explore the effect of CPU on the company's biodiversity reporting for the US firm from 2002 to 2018. Consistent with legitimacy and signaling theories, we find that CPU improves the extent of biodiversity reporting by 18.7%, supporting the CPU‐driven biodiversity reporting enhancement hypothesis. The results show that firms are proactive in managing biodiversity risks related to regulatory uncertainty. Doing so can generate various benefits for firms, including improved reputation as well as signaling firms' preparedness to comply with upcoming biodiversity reporting regulations.