Title: Natural capital and the term-structure of sovereign bonds
Authors: Dieter Wang - VU Amsterdam (Netherlands) [presenting]
Abstract: Sustainability more broadly and environmental risks, in particular, have become a key issue in the financial world. The aim is to explore the relationship between the country's national wealth, comprising human, natural and produced capital, and its sovereign bonds. We study 22 high and 12 middle-income countries and relate the level, slope and curvature of their government yield curves with their wealth accounts. We document significant and profound impacts of wealth, which reflects a country's long-term growth potential, even after controlling for macro-financial variables and global bond factors. Natural capital raises yields in high-income countries but lowers yields in middle-income countries. Renewable natural wealth, such as forests, agricultural land or protected areas, can be seen as either worthwhile investments or opportunity costs. We discuss the effect of non-renewable fossil fuels and minerals in the context of the natural resource curse and the energy transition.