Environmental conservation can play a significant role in the evaluation of an investment asset and its future progress, according to a new study co-authored by Canada-based researchers.
“Our results show that to a certain degree, [biodiversity protection] will impact the production, the size and the production of the establishment that is near a protected area,” says Lilian Ng, professor of finance and the Scotiabank chair in international finance at York University’s Schulich School of Business, who co-authored the report.
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“Which is telling us that if you’re going to invest in those areas, you have to anticipate all these risks associated with biodiversity in the form of regulatory risk and reputational risk.”
Biodiversity protection — designated habitats that are conserved to protect the natural environment — is becoming a key financial risk consideration for corporations and investors, she says.
“I think our results are important in a way that for investors who care about the environment, who care about the loss in biodiversity, they should look into the investments that are located near the protected areas.”
The report argues proximity to protected areas shapes establishment-level environmental, operational and financial outcomes. Indeed, firms with locations around those protected areas find significantly reduced toxic emissions.
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The researchers evaluated data from 1990 to 2021 and found these protected areas significantly reduce toxic emissions, driven not by cleaner technologies but by production cutbacks and workforce contraction.
She was most surprised that her colleagues were able to review existing data sets for protected areas like national parks.
“We didn’t think that it [would] have any impact at all . . . . We were very surprised to find that plants that are located near these protected areas [would] be impacted.”
Ng says biodiversity can directly affect cash flows and firm value since companies were found to respond to the “heightened biodiversity-related oversight” by scaling back activity, which the researchers noted can lead to lower profitability and weaker valuations.
The study was co-authored with Amir Akbari from McMaster University’s DeGroote School of Business, the University of Auckland’s Marty Pham and Jing Yu at the University of Sydney.
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