A Sovereign Environmental Wealth Index: A Financial Framework for Measuring and Managing Sustainability Risk

The increasing importance of climate change, natural resource constraints, and sustainability-related risks has created a growing need for quantitative measures that connect environmental performance with economic and financial decision-making. Existing environmental and ESG indicators provide valuable assessments of sustainability conditions, but they are generally designed as ranking or reporting measures rather than dynamic financial indices suitable for risk modeling, portfolio analysis, and long-term economic evaluation. This paper proposes a sovereign-level environmental wealth framework that translates environmental performance into financially interpretable time-series indices. Using fourteen World Development Indicators (WDIs) covering environmental conditions and environmentally relevant economic characteristics for ten major economies, we construct Dollar Environmental Financial Indices (DEFIs). The proposed framework combines standardized environmental information with economic capacity, represented by GDP per capita, to measure the economic value associated with national environmental performance. The resulting indices are not intended to represent directly traded financial securities, but rather synthetic environmental wealth benchmarks that allow sustainability-related risks to be analyzed using established tools from financial economics. We further construct a Global Dollar Environmental Financial Index (GDEFI), which represents the common global component of environmental performance and serves as a benchmark for evaluating systematic environmental exposure across countries. Using robust regression, dynamic econometric models, and volatility analysis, we estimate environmental beta coefficients and examine how country-level environmental conditions respond to global environmental movements. Estimated environmental betas range from −0.708 (Australia) to 1.617 (China), while the explanatory power of the global benchmark reaches an adjusted R2 of 0.886 for the United Kingdom, demonstrating substantial cross-country heterogeneity in environmental exposure, risk dynamics, and resilience. To demonstrate the usefulness of the proposed framework, we apply risk-adjusted performance measures, including Jensen’s alpha, Sharpe ratio, Sortino ratio, and the Rachev ratio, together with mean–variance and CVaR-based portfolio optimization methods. These analyses show that environmental exposures exhibit distinct risk–return and tail-risk characteristics, highlighting potential diversification benefits in sustainability-oriented decision frameworks. Maximum-likelihood factor analysis further indicates that a three-factor structure provides an adequate representation of the common variation in environmental performance across countries. Finally, we provide a conceptual illustration of how environmental index-based derivatives could support future sustainability risk management. While DEFIs are not currently tradable assets, the proposed framework establishes a bridge between environmental measurement and financial modeling by allowing environmental risk to be evaluated through the analytical tools traditionally applied to financial markets.