Investor preferences for biodiversity conservation and disaster risk reduction in sustainability bonds: Evidence from Japan

While investors increasingly prefer broad, multi-thematic ESG and sustainability bonds, instruments focused specifically on biodiversity remain underrepresented in the market. Few empirical studies have investigated investors' preferences for these specialized environmental objectives. Using a discrete choice experiment and survey data from 575 Japanese investors, this study compares preferences for municipal bonds funding biodiversity conservation, disaster risk reduction, or a hybrid of both. Bayesian random-parameter model estimates indicate that investors generally prefer multifunctional bonds over pure conservation initiatives, likely because biodiversity conservation projects are more difficult to monetize. However, substantial preference heterogeneity exists: respondents with stronger environmental or disaster risk awareness are more likely to favor specialized projects. We estimate a sustainability premium of approximately 0.35 percentage points relative to Japanese 10-year government bonds, suggesting that investors are willing to accept slightly lower yields in exchange for environmental impact. The findings also show that an investor’s attachment to their local area does not increase demand for local bonds. Instead, investors prioritize projects with higher conservation impacts in ecologically significant regions, even when located further from their residences. Although financial returns and credit ratings remain decisive factors, scaling biodiversity finance requires reframing ecosystems as preventive capital that enhances regional resilience.