Are institutional investors effective in mitigating biodiversity risks?

Using a large dataset of US firms over the period 2007–2022, I find that institutional ownership is associated with fewer biodiversity risk incidents, suggesting a significant role of institutional investors in combating biodiversity loss. The finding is robust to various fixed effects, extends to alternative measures of biodiversity risks, and persists even after adjusting for past incidents. Using plausibly exogenous variation in investors’ monitoring ability indicates causality. The effect is strongest for long-term and domestic institutional investors. Foreign institutions are generally associated with an increased biodiversity risk, but this relationship is less pronounced when they originate from countries with a strong environmental and biodiversity awareness. Finally, biodiversity risk incidents are positively associated with the implied cost of equity capital, consistent with the notion that investors demand compensation for biodiversity risk exposure.