Market Valuation of Biodiversity Risk: Evidence from the EU Nature Restoration Law

This research examines the influence of biodiversity policymaking on investment decisions, using the example of the EU Nature Restoration Law. Employing event study methodology and multivariate regression analysis on a sample of listed EU firms, this research assesses stock price reactions, taking into consideration industry sensitivity, corporate sustainability commitment, and country attitudes to biodiversity conservation. The findings reveal significant negative stock price reactions to the proposal and adoption of the Nature Restoration Law, leading to declines in EU firm valuations. Investors seem to view the law as especially harmful to firms in biodiversity-sensitive industries. Strong corporate sustainability commitment does not reliably protect firm value, with environmental performance even having a negative effect on stock returns. Finally, market reactions vary based on country attitudes toward biodiversity, with investors favoring countries opposing the law, as these may be less stringent in implementing it. This study contributes to the research fields on investor responses to environmental regulation, and biodiversity finance – the latter having received limited academic attention thus far. Overall, the results highlight a growing investor awareness of biodiversity. However, the results also warn that inconsistencies in countries’ implementation of international regulations can hinder asset allocation toward more sustainable investment.