Forests, fisheries, freshwater, and biodiversity are not only environmental resources. They also support economic activity and growth. When these natural assets deteriorate, the consequences can ripple through the economy and potentially affect the cost of government financing.
Governments are central to protecting nature, and issuing
sovereign green bonds is one way to finance environmental projects such as renewable energy, clean transportation, biodiversity conservation, sustainable water management, and forestry.
But do investors consider a country’s natural assets when pricing its green debt? Do promises to protect the environment affect borrowing costs, or do investors wait for evidence that projects have actually been implemented?
In a new paper, we examine sovereign green bonds issued between 2016 and 2024, and then study more than 15,000 municipal green bonds to determine whether our findings extend from national to local public finance. In addition to bond-market information, we use issuers’ green bond frameworks, allocation reports, and impact reports to distinguish between governments’ stated intentions and their subsequent efforts.
Three findings stand out.
First, nature-related risks are associated with the cost of public green debt. Sovereign green bond yields are higher when countries score higher on out measures of biodiversity and natural-capital risk. This relationship appears both when bonds are issued and when they subsequently trade in financial markets.
We also compare green bonds with similar conventional bonds issued by the same government. The association between natural-asset risk and yields is generally stronger for green bonds, particularly in the secondary market. This is consistent with these risks being especially relevant for securities intended to finance environmental projects.
The municipal bond evidence points in the same direction. State-level measures of endangered bird species are positively associated with municipal green bond yields. Nature-related risks may therefore matter not only for national governments but also for state and local authorities.
Second, investors appear to distinguish between environmental promises and implementation.
When issuing a green bond, a government typically outlines the types of projects it intends to finance. Those projects typically include biodiversity conservation or natural-resource management. However, simply listing these objectives is not significantly associated with lower bond yields. We find a similar result for bonds linked to the United Nations Sustainable Development Goals, specifically Life Below Water (Goal 14) and Life on Land (Goal 15).
The results differ when governments report on actual project implementation. Governments that showed an effort to mitigate these risks through these green projects generally received lower yields on their green bonds. This suggests investors value action more than commitments alone.
The distinction has an important implication for sustainable finance. Issuing a green bond and announcing eligible projects are only the beginning. Allocation and impact reports enable investors to see how proceeds are used and whether projects move forward.
Third, the paper examines whether green financing leads to measurable environmental improvements . We do not find a statistically significant relationship between governments’ interim or net-zero targets and changes in per-person carbon emissions over the following three years. Broad climate commitments, by themselves, are therefore do not lead to clear improvements in this measure.
The forestry results are more encouraging. Approximately 40% of the sovereign green bonds in our main sample support sustainable forestry. In countries that finance these projects, the years following green bond issuance are associated with increased forest area and reduced forest-cover loss. Although these findings should be interpreted as associations, they suggest that examining outcomes tied to specific projects may be more informative than evaluating broad commitments alone.
Our study contributes to sustainable finance in two ways. First, it expands the discussion beyond climate risk to include biodiversity and the depletion of natural resources. Second, it shifts attention from corporate securities to public debt, where governments have both a responsibility for protecting natural assets and a need to finance that protection.
The main message is straightforward. Nature-related risks are associated with public borrowing costs, while mere promises to protect the environment contain limited pricing information. What appears to matter more is whether governments translate their commitments into observable projects and outcomes.
For governments entering the green bond market, the green label is a starting point. Implementation is what gives that label substance.
Jitendra Aswani is an affiliated researcher at MIT Sloan School of Management, and William W. Xiong is an assistant professor at the State University of New York, Binghamton. This post is based on their recent paper, “Natural Assets and Public Green Debt,” available here.