Pricing the Priceless: The Financial Cost of Biodiversity Conservation

Biodiversity loss as a global concern requires dramatic shifts in conservation efforts that carry substantial costs. We offer an initial investigation into how the financial market prices such conservation costs, exploiting the “Green Shield Action” (GSA) — a regulatory change aimed at preserving biodiversity in national nature reserves in China — as an exogenous shock to local public financing. We document that GSA, while improving biodiversity, augments the yields of municipal corporate bonds by around 25 basis points. The effects are more pronounced for bonds with shorter maturities and for local governments in weak fiscal positions. The increased cost of public capital can be largely attributed to transition pressure resulting from pre-existing economic activities within reserves and the growth in local public spending on biodiversity following the reform. Investors show little consideration towards endeavors counteracting biodiversity loss beyond financial payoffs. Our findings also provide insights concerning investor education and policy interventions for addressing the financing gap for biodiversity conservation.