Biodiversity Risk, Corporate Strategy and Financial Implication

<p dir="ltr">Biodiversity loss has become a pressing global issue with far-reaching and multifaceted implications for economic systems, corporate behaviour and financial markets. Given the growing recognition of biodiversity risk as an important factor in corporate decision-making, it becomes essential to investigate how this type of risk influences business operations and firm behaviour. Against this backdrop, this thesis examines the economic impact of biodiversity risk through three interrelated dimensions: auditor risk assessment, bank lending decisions and the financial implications of biodiversity risk index, thereby providing new insights into the strategic significance of biodiversity risk in both corporate governance and financial decision-making.</p><p dir="ltr">Chapter 2 examines how client exposure to biodiversity risk affects audit fees. Drawing a dataset of Chinese listed firms from 2010 to 2020, this chapter quantifies biodiversity risk through two dimensions: the weighted average geographical proximity to key ecological areas, and the extent of biodiversity-related disclosures in annual reports and corporate social responsibility (CSR) reports. The results show that increased biodiversity risk correlates with higher audit fees and a deterioration in financial reporting quality. In addition, this chapter investigates how biodiversity-related physical and transitional risks operate as mechanisms influencing the audit process. Subsequent analysis reveals that social awareness; government intervention and firms' proactive environmental strategies mitigate these impacts.</p><p dir="ltr">Chapter 3 examines banks' perceptions of biodiversity risks in borrowing firms and their impact on the terms of loan agreements. This chapter shows that banks have perceived the material impact of biodiversity risks and have implemented strict loan covenants to address biodiversity risks, and that this effect is stronger when borrowers are exposed to higher biodiversity-related physical risks and transition risks. Further analysis shows that social awareness of biodiversity conservation has a significant impact on banks' perception of biodiversity risks in their lending decisions. Cross-sectional analysis shows that these effects are more pronounced when lending banks are large state-owned banks, have no relationship with their clients, or are located in cities with strict biodiversity regulations, while when borrowing firms have a poor reputation, opaque information, or lack green innovation.</p><p dir="ltr">Chapter 4 constructs and analyses the global biodiversity risk index, which provides a systematic framework for comparing risk across countries and sectors. Based on the TNFD Biodiversity Disclosure Framework, this chapter develops a multidimensional risk measure including physical risk, transition risk and environmental opportunity using text analysis and machine learning methods. By analysing data from listed firms in major global capital markets from 2010 to 2021, this chapter finds significant differences in biodiversity risk management performance across countries and industries. In addition, firms with higher global biodiversity risk index scores perform better on several dimensions, including ESG performance, carbon control, social giving, ability to raise capital and business performance. This chapter extends the economic analysis of biodiversity risk and highlights the critical role of disclosure and management of such risk in the implementation of corporate strategies.</p>