Nature as a Defense from Disasters: Natural Capital and Municipal Bond Yields

This paper shows that natural capital loss affects financial markets and municipalities’ borrowing costs. Using exogenous geographic variation in wetland changes, I find that losses in wetland areas are related to an increase in municipal bond yields due to increased downside risk and extreme weather uncertainty. Municipal bond markets price natural capital loss risk following extreme weather events. The effect is more prominent for longer maturity bonds, bonds issued by counties more reliant on local tax revenue, and farming communities. The results show one of the costs of natural capital destruction on financial markets and local government’s finances.