In new research, Jitendra Aswani and William W. Xiong show that countries facing greater risks to their natural assets, from overfishing to deforestation, pay more to borrow, as investors discount their long-run growth prospects. Governments can reduce that premium by implementing green projects that address the risks they actually face, but announcing an intention to do so is not enough.
Over half of the global economy is meaningfully dependent on nature and the goods and services it generates, including food, natural climate regulation, and mental health benefits. According to J.P. Morgan Asset Management, losses to natural resources cause estimated damages of $4-20 trillion per year, and even this estimate does not capture all nature-related benefits.
Understanding how to account for the value of natural resources is crucial for economic growth, and the neoclassical literature on exhaustible resources, including biodiversity loss and natural resource depletion, has explored the issue extensively. For instance, John Hartwick argued that an economy can maintain constant consumption even as it depletes natural assets, if it reinvests all rents from natural-asset extraction into reproducible capital. However, such theoretical works rely on specific modeling assumptions that past literature has been unable to validate. Thus, whether the adverse impact of deteriorating natural assets on economic growth can be mitigated with reinvestment in reproducible capital remains an open question.
The cost of risk to natural assets
Growth is an important determinant of government tax revenue. Because the government bears the primary responsibility for protecting natural assets, such as biodiversity and natural resource preservation, we hypothesize that a negative association between risk to natural assets and growth would also affect the cost at which a sovereign government can borrow. By contrast, private institutions such as corporations tend to invest mainly in non-public forms of natural capital that serve as direct inputs into services, such as farms, plantations, and houses. Private institutions that benefit from protecting their natural capital, like honey producers, will invest to protect their bees. However, on the whole, private institutions are less interested in protecting shared natural resources like riverways or forest cover that may count as a public good to be protected by the government. For these reasons, we examine whether biodiversity loss and natural resource depletion affect the cost at which sovereigns borrow.
The World Economic Forum’s Global Risks Reports from 2021 to 2025 ranked biodiversity loss and natural capital risk as highly significant, second and fourth among all 33 global risks considered. For the cost of borrowing, we focused on sovereign green bonds: financial instruments specifically designed to address negative externalities such as biodiversity loss and risks to natural capital. Additionally, we examined whether sovereigns’ intentions and efforts to mitigate these risks are reflected in the cost of debt that finances them. A country’s “green intentions” are reflected at the issuance of green bonds, when the country discloses through framework, second opinion, capital allocation, and impact reports the categories and estimated impact of green projects funded by the bond proceeds.
To evaluate whether biodiversity and natural capital risks are incorporated into the pricing of sovereign green bonds, we analyzed data from the Bloomberg Global Fixed Income Database. Our sample comprised 216 sovereign green bonds issued between 2016 and 2024 and raised for green projects.
We derived our estimates of biodiversity loss and natural capital risk from two primary sources: overfishing and a country-level environmental social governance (ESG) database, which included estimates of forest cover loss, the depletion rate of forests (as a percentage of gross national income (GNI)), the depletion rate of natural resources (as a percentage of GNI), and the freshwater withdrawal rate (as a percentage of internal resources).
Our findings indicate that investors price risk to natural assets. Specifically, increases in overfishing (a biodiversity risk) and in deforestation (a natural capital risk) are associated with higher green bond yields. A one percent increase in risk to natural assets increases the offer yield by 21 to 40 basis points depending on the specification. Higher sovereign bond yields linked to heightened risks to natural assets suggest that investors discount countries’ long-run growth prospects, consistent with Joseph Stiglitz’s theoretical model, which suggests that resource depletion could reduce future economic growth. These findings hold when green bonds are compared with conventional bonds issued by the same country in the same year with similar characteristics, indicating that the relationship does not simply reflect the higher borrowing costs of countries with weaker economies.
Intentions vs. efforts
As biodiversity loss and the risk to natural capital can be mitigated by initiating and implementing green projects using bond proceeds, we examined whether the intention to initiate green projects and the efforts to implement them alter the relationship between risk and bond prices.
First, we measured green intentions using the ESG framework reports that the sovereign issuer provides to investors at bond issuance. The framework highlights the green project categories in which proceeds would be used, the management of proceeds, and future green reporting. We found that mere intentions do not significantly influence investor behavior toward environmental risks.
Next, we looked at impact and capital allocation reports, with which the bond issuer provides investors after the issuance. We measured “green efforts” as the actual number of green projects implemented per dollar of proceeds. We found that countries’ green efforts are recognized by investors when they align with the direction of risks. This suggests that sovereign green bond investors understand green-washing concerns and, therefore, wait to see material efforts by sovereign issuers to mitigate the biodiversity loss and natural capital risk before providing refinancing or demanding any rebate.
Additional findings
Several case studies affirm the relationship between higher environmental risk and higher government bond yields. Following the 2023 collapse of Peru’s anchovy fishery, Peru’s green bond yield increased by an initial 8.7 basis points. These findings are in line with those from Alexandre Garel, Arthur Romec, Zacharias Sautner, and Alexander Wagner, who showed that shareholders demanded a 2.2% premium for corporate biodiversity risk following the 2021 Kunming Declaration, a global biodiversity framework that highlighted how biodiversity risk reduces future growth. Conversely, debt holders rewarded the European Union’s adoption of its deforestation regulation in 2025 with a reduction in the yield demand. The regulation not only creates a legal backstop that technically covers EU-grown timber and commodities but also requires importers of commodities like palm oil and rubber to ensure their products are not produced on land deforested after 2020. For the latter two cases, we suspect that merely drawing attention to these environmental issues impacted bond yields. However, while the Kunming Declaration underscored risks, the EU regulation committed Europe to a material reduction in biodiversity loss.
Lastly, we assessed the environmental performance of the sovereign green bond issuers to see if their investments bore results. Since carbon emissions, the standard measuring stick, may not represent the same negative value for each country, we evaluated environmental performance based on the outcomes of projects funded by green bond proceeds. As 40 percent of sovereign green bonds are issued for sustainable forestry projects, we examined the percentage of forest area within habitable land and the loss of forest cover (in hectares) in those countries and compared these environmental measures with those of other green bond issuers. We found a 0.2 percentage-point increase in forest area as a share of habitable land and a 684,000 hectare reduction in how much forest cover loss would have occurred otherwise at current rates following green bond issuance and the investment of proceeds in sustainable forestry.
Conclusion
Overall, our work shows that investors care about risks to natural assets, whether to the conservation of biodiversity or to the preservation of natural capital, which in turn suggests that environmental risks reduce a country’s expected growth. This finding aligns with Partha Dasgupta and Geoffrey Heal’s work on exhaustible resources, which suggests that natural resources are crucial for a country’s future economic growth. Although actual implementation of green projects can mitigate those risks, merely expressing intentions to initiate them is insufficient to persuade investors. Efforts must actually be taken, and these efforts must align with perceived risks to effectively influence investors’ risk preferences. Among the countries issuing green bonds, we found increases in forest area and reductions in forest cover loss following those investments, suggesting measurable environmental improvement in the sustainable forestry category.
We generalize these results in two ways. First, rather than estimating “green intentions” from framework reports, we measured it using sovereign governments’ adoption of development goals to mitigate biodiversity loss and decline of natural resources. These are the same governments which issued green bonds. Second, to generalize for public green debt, we showed the same results using United States municipal green bonds.
We believe these results have implications for national governments and municipalities, which are interested in issuing or already have issued green bonds to support biodiversity conservation and natural resources preservation. Our findings suggest that investors of green debt want to witness the efforts and outcome of the green projects supported by them rather than just believing in the government’s intentions. Governments appear to understand this already to an extent. A greater commitment to mitigation risk to natural resources presents an even greater boon to the environment, citizens, government funding and investors alike.
Authors’ Disclosures: The authors report no conflicts of interest. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
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