Nature and the capital market: analyzing the spillover effect between biodiversity and heavy industry stock indices

This study breaks new ground in investigating the volatility transmission between biodiversity stock indices and those from heavy industry sectors such as mining, chemicals, and energy. We estimate volatility transmission indices using data from March 2010 to April 2024, incorporating three biodiversity indices and five indices from heavy manufacturing and energy companies. By employing a dynamic Time-Varying Parameter Vector Autoregressive (TVP-VAR) model, the research identifies which indices serve as exporters or importers of volatility on a global scale, shedding light on the relationship between environmentally focused companies and traditionally pollution-intensive industries. The results indicate that biodiversity measures are significant sources of volatility, particularly impacting the mining and energy sectors. Additionally, the study explores portfolio diversification and asset allocation strategies, assessing the effectiveness of biodiversity assets in hedging. The findings provide important and policy-relevant insights. For ESG-oriented investors, integrating the systemic impact of biodiversity assets into risk models is essential for informed decision-making. Policymakers can enhance the stability and integration of these markets by promoting standardized biodiversity disclosures, incentivizing biodiversity-linked instruments, and implementing regulatory tools that address nature-related financial risks. Collectively, these efforts foster a more resilient financial system and help align biodiversity finance with global sustainability objectives.