Do banks price firms' biodiversity risk? Evidence from the Kunming declaration

The pricing of firms' biodiversity risk exposure, as an emerging dimension of environmental risk, remains a contentious topic. This study employs the international syndicated long loan data from 2013 to 2023 and adopts the exogenous shock of the Kunming Declaration as an identification strategy to examine the effects of biodiversity risk on firms' loan spreads. The findings reveal that: (1) Following the Kunming Declaration, firms with higher biodiversity risk are subject to significantly higher loan spreads, underscoring the presence of a biodiversity risk premium; (2) Firms with weaker debt-paying ability experience even greater increases in loan spreads when exposed to biodiversity risk. Additionally, banks with commitments to ecological sustainability, namely green banks, charge higher loan spreads to firms with higher biodiversity risk than other banks; (3) Banks weigh biodiversity transition risk more heavily than physical risk in their loan pricing processes; (4) From the perspective of the interaction between legal institutions and financial mechanisms, this paper finds that the biodiversity risk premium in syndicated loans is primarily driven by the common law system; (5) In addition to charging higher loan spreads, banks mitigate their biodiversity risk exposure by cutting loan amounts, shortening maturities, and raising fees. This study contributes new evidence to the ongoing controversy on biodiversity risk pricing and offers policy implications for policymakers, financial institutions, and firms in managing biodiversity risk.