Biodiversity Risks in Commodity Markets

As global biodiversity declines, market participants are increasingly attentive to the financial implications of biodiversity risks. We study the effects of biodiversity risks on commodities futures returns using a novel biodiversity risk index over 2005-2022. Biodiversity risks can’t predict commodities returns, suggesting risk underestimation. Using dynamic conditional correlations (DCCs), we further show that precious metals offer diversification against biodiversity risks, while energy commodities can serve as a hedge or safe haven. However, agricultural commodities don’t provide protection against biodiversity risks, potentially increasing investors exposure to these risks. Our findings are significant for investors and regulators interested in addressing biodiversity risks.