Dynamic linkages and spillover effects of biodiversity risk in socially responsible investment and commodity markets

Abstract

This study employs a novel biodiversity risk measure, developed through textual analysis, to examine how biodiversity risk affects socially responsible investment (SRI) and commodity markets. Biodiversity-related financial risks, arising from ecosystem degradation, represent an emerging and underexplored dimension of market risk, particularly for investors seeking sustainability-aligned portfolios. Our analysis reveals that both SRI equity and commodity indices consistently exhibit negative time-varying correlations with biodiversity risk, with correlations as low as −0.62 for the FTSE4Good US 100 and -0.53 for the FTSE4Good Global 100. Similarly, commodities like silver, gold, crude oil, and wheat also show negative correlations with biodiversity risk. These findings indicate that neither asset class serves as a reliable hedge against biodiversity-related shocks. Furthermore, biodiversity risk has a significant long-term spillover effect on SRI equity and commodity market returns. As biodiversity risk increases, it strengthens the connectedness between these markets, thereby amplifying the transmission of risk across them. These findings highlight the need for new risk management strategies and regulatory frameworks that account for biodiversity risk, opening new research pathways in finance and environmental sustainability.