When Nature Talks, Markets Move: Forecasting the Equity Premium With Eco-Climate Incidents

Abstract

This paper examines the role of eco-climate information, particularly biodiversity risks, in forecasting the U.S. equity premium. Using RepRisk controversy data, we construct indicators for biodiversity, greenhouse gas emissions, and local pollution. Biodiversity indicators emerge as strong predictors of the equity premium, outperforming other eco-climate risks in return predictability and trading performance. The findings highlight the importance of incorporating biodiversity risks into financial decision-making, with implications for investors, policymakers, and the broader financial system.