Abstract
<jats:p>Transition biodiversity risk is increasingly recognised as a source of financial risk, yet no framework exists to translate firm-level biodiversity impacts into credit risk metrics comparable to those developed for climate transition risk or even biodiversity dependency risk. This paper fills that gap by adapting the cost pass-through input-output methodology, established in the climate transition risk literature to biodiversity. We construct country- and sector-level biodiversity impact intensities across six pressure categories using Exiobase 3 and LC-IMPACT characterisation factors, monetise them using willingness-to-pay externality costs, and propagate the resulting cost shock through the supply chain via sector specific pass-through rates. The propagated cost is mapped to firm-level probability of default through a Merton structural model, applied to the STOXX Europe 600. Results show that indirect supply-chain exposure dominates direct exposure by more than two to one and that land use and water consumption are the primary financial risk drivers. Weighted-average probability of default rises from 0.17% to 2.05% under the central scenario. Impacts are concentrated across a small number of firms and impact channels, with land use and climate change accounting for most of the impact. Externality cost estimates and pass-through calibration are the dominant sources of methodological uncertainty, each requiring explicit assumptions that are difficult to standardise across scenarios. In aggregate, biodiversity scenario design involves a fundamental trade-off between flexibility and supervisory comparability, one that pre-competitive collaboration can help address.</jats:p>