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Noisy biodiversity: the impact of ESG biodiversity ratings on asset prices

Author

Listed:
  • Xin, Wei
  • Grant, Lewis
  • Groom, Ben
  • Zhang, Chendi

Abstract

The biodiversity components of ESG ratings are analysed to understand whether this disclosure mechanism can affect investment decisions, improve outcomes for biodiversity or lead to better management of nature-based risks. We analyse the relationship between stock returns and firms' biodiversity ratings and how biodiversity ratings are related to firm characteristics. We conclude that biodiversity ratings are largely uncorrelated to firm characteristics other than via firm size, and do not predict stock returns. Analysis of operating performance sheds light on why: returns on assets and profit margins are not affected by biodiversity ratings. Systematic risk, idiosyncratic risk and firm valuation are also not influenced by overall biodiversity performance. The effect is heterogeneous across industries: biodiversity ratings predict negative returns in metals and mining but positive returns in utilities. Further, institutional investors and sell-side analysts ignore biodiversity ratings in their decision-making. A suite of tests suggests that biodiversity as measured in ESG ratings does not provide useful additional information for financial decision makers. It is difficult to see how, on its own at least, the measurement and disclosure of biodiversity via ESG ratings currently helps achieve any target related to biodiversity and nature recovery or improves the management of nature-based risks.

Suggested Citation

  • Xin, Wei & Grant, Lewis & Groom, Ben & Zhang, Chendi, 2025. "Noisy biodiversity: the impact of ESG biodiversity ratings on asset prices," LSE Research Online Documents on Economics 128185, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:128185
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • Q57 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Ecological Economics

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