Biodiversity loss is a crucial concern that demands a transition from current practices, which is anticipated to come at a substantial economic expense. However, how such a transition is priced in the financial markets remains unclear. In this paper, we aim to explore the impact of the “Green Shield Action” - a regulation change geared towards preserving biodiversity in nature reserves - on the local public financing costs in China. In a causal context, we show that this transition increases the municipal corporate bond yield by around 24 basis points. Employing precise geographic information and government procurement records, we emphasize the significance of transition costs as a pivotal mechanism. We find that the effects can be attributed to the transition pressure resulting from pre-existing human activities within nature reserves, and public spending related to biodiversity demonstrates notable growth following the reform. This paper provides a reference for addressing the financing gap in biodiversity conservation efforts and offers valuable insights for future regulatory interventions to counteract the declining trend of biodiversity.
