This effect is strongest for forest capital and to a lesser degree agricultural land. Table 4 shows the corresponding values for short-term, 2-year yields. Taking together, renewable forest and agricultural capital lowers the entire curve but also steepens it. Economically, this can be interpreted as a lowering of overall borrowing costs while also improving economic prospects in the short-run. The effect is different for protected areas, which carries a positive coefficient. While sharing the same sign with non-renewables, both effects should not be equated with each other. Table 4 shows that the effect of protected areas is insignificant in the short-run. In terms of coefficient magnitudes, the long-term effect outweighs the short-term effect, indicating an upwards tilting effect on the yield curve. In comparison, subsoil assets are significant for both 2-year and 10-year maturities and have a depressing effect on the yield curve slope. To give context to the positive coefficient on protected areas, it is worth mentioning that its value is based on opportunity cost calculations (World Bank, 2018). In other words, it is the value of foregone rents that could have otherwise been derived from agricultural production. This implies that growth in protected areas will have a stronger impact in countries that rely more on the agricultural sector. We will revisit this issue in Section 4.6. Albeit significant, it is important not to overemphasize this effect, since protected areas constitute less than 5% of overall natural capital (Table 2).

The following paragraphs suggest and discuss two possible economic explanations behind these findings.14

- **Worthwhile investment**

- Investments into natural wealth foster sustainable growth, improve the country’s fundamentals and thereby decrease the default risk. Lower bond yields are the result of the improving the economic foundations.

- **Luxury investment**

Growth in natural capital is the result of prosperity. Lower yields are a reflection of the higher income of the issuers. Only developed countries have the capacity to invest into non-productive natural capital.

To determine which explanation is most suitable, we turn to the underlying data sources of natural capital. Figure 7 indicates that agriculture and forests lower borrowing costs because they are worthwhile investments, while the effect of protected areas is more likely the result of a luxury investment.

# **4.4 Forests**

Forest capital serves as a primary input for production through logging of trees, generates employment for more than 13 million people (IPBES, 2019) and is necessary for other ecological benefits such as improved air and water quality (Lange et al., 2018). For instance, non-timber forest capital reflects the value of watershed protection, hunting, fishing, along with other ecosystem services that are usually not accounted for, but are relevant for food production, biodiversity and human health (Lange et al., 2018). Tourism in forest-covered protected areas constitutes a major share of the 8 billion visits (FAO and UNEP, 2020).

> 14Theoretically, a third option is also possible, where (labelled) bond proceeds are directly invested into environmental projects. This explanation is likely to become more relevant as the number sovereign green bond issuances grows, but it is outside the scope of this study.

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