Biodiversity finance: Sovereign biodiversity loss drivers and financial stability

Abstract This study analyzed the impact of sovereign biodiversity risk drivers on financial stability. Using a global dataset covering 2004–2021, I found empirical evidence that the biodiversity risks land use, drought, and freshwater stocks significantly affect the systemic risk measures SRISK and systemic expected shortfall (SES). This study also found empirical evidence that including non‐financial risks in banks' risk assessments is beneficial for financial stability because lending makes borrowers more aware of sustainability. By providing empirical findings on the influence of country‐specific biodiversity risk drivers on market‐based systemic risk measures, this study provides suggestions for a stronger consideration of biodiversity risks in the risk management of banks by regulators and central banks.