Pricing the Unseen: Sustainability, water stress and global financial markets

Financial markets are increasingly taking sustainability concerns into account. The industry initially began by incorporating broad sustainability ratings into investment portfolios. In this context, Chapter 2 addresses the question of whether there is a relation between the broad index, the Sustainable Development Goals, and sovereign default risk. It studies to what extent sustainability is priced in the sovereign credit default swap market and what might drive this relation.

As the field of sustainable finance grows, attention is shifting to the financial relevance of specific ecological issues. Along these lines, Chapter 3 provides novel evidence that investors demand compensation for exposure to water stress in U.S. agriculture-dependent counties. It examines the potential sources of the relation between water stress and municipal bonds, as well as whether bond maturity plays a role. Chapter 4 presents an analysis of the relation between water use, water stress, and global stock returns. It studies the difference between water use and water stress and disentangles indirect from direct water use.

Together, the chapters in this thesis provide a comprehensive analysis of the relation between sustainability and three distinct asset classes: sovereign bonds, U.S. municipal bonds, and global equities.