A0708
Title: Biodiversity risk in commodity futures
Authors: Ana-Maria Fuertes - City University London (United Kingdom)
Kate Phylaktis - City University London (United Kingdom)
Zheng Zhang - City University London (United Kingdom) [presenting]
Abstract: The purpose is to investigate whether biodiversity risk is priced in commodity futures markets and whether such risk contributes to downside tail exposure. While prior studies have focused on climate risk, we examine biodiversity as a distinct environmental risk. The analysis uses a news-based biodiversity risk index from The New York Times constructed at the daily frequency by a prior study, and evaluates 25 commodity futures across agriculture, energy, and metals. A multi-method approach is adopted, combining Fama-MacBeth regressions, lag-augmented local projections, and event studies. Downside risk is also estimated using value-at-risk and second-order lower partial moments. Findings suggest that biodiversity risk is not persistently priced in the cross-section of commodity returns. However, significant but short-lived abnormal returns are observed around biodiversity-related policy shocks, particularly under heightened macro-policy uncertainty. Furthermore, unexpected biodiversity shocks contribute meaningfully to downside risk, especially in agriculture and energy markets. These results suggest that biodiversity risk is not yet a systemic factor in commodity pricing but is becoming increasingly relevant in event-driven, state-contingent contexts. The findings highlight the need for improved biodiversity risk disclosure and underscore the importance of incorporating biodiversity scenarios into risk management and stress testing frameworks.
