Biodiversity risk and firm performance: Evidence from US firms

Abstract

Biodiversity loss is considered as a critical global challenge with significant implications for ecosystems, economies, and societies. While the importance of biodiversity conservation is widely acknowledged, the extent to which biodiversity risk impacts firm performance remains an under-explored area of research. This paper examines how biodiversity risk affects firm performance using a new measure of firm-level biodiversity risk generated from textual analysis of firms' 10-K reports. Our multivariate analysis shows that biodiversity risk significantly hinders performance of firms in the United States during the 2001–2021 period. The finding holds well after controlling various confounding factors, using alternative variable measurements, model specifications, and correcting for endogeneity problems in the biodiversity risk-firm performance nexus. Besides decreasing sales growth and profitability, biodiversity risk increases in the cost of goods sold, as explained by the Cobb–Douglas production function. Interestingly, we find that the effect is stronger for firms in biodiversity-sensitive industries, weaker for firms with more product innovation, and remains insignificant for firms with top-tier performance. Our study provides policy and practical implications for businesses to mitigate biodiversity risk in this contemporary era of ecological degradation