The Impact of Nature Restoration Law on Equity Behavior: How Biodiversity Risk Affects Market Risk

This study examines the market reaction to the approval of the Nature Restoration Law, a key component of the EU Biodiversity Strategy, and its implications for biodiversity-related financial risks. Using an event study methodology, we analyze the equity price movements of companies listed in the MSCI Europe Index that are equally weighted in relation to the announcement. We select the RepRisk Due Diligence Score, focusing on incidents linked to landscapes, ecosystems, and biodiversity, as a measure of biodiversity risk. At first, it seems that companies with a high RepRisk Due Diligence Score show limited or positive abnormal returns, suggesting that biodiversity risks are already priced for companies that have experienced incidents linked to this issue. Conversely, firms with lower biodiversity risk exposure see null or negative impacts, reflecting heightened investor concerns about new environmental regulations or compliance costs. Although the event does not have a systemic impact on European companies in the index, it seems that some sectors are affected when analyzed using parametric and non-parametric distributions.