Sustainability uncertainty and the dynamics of green asset markets

This study investigates how different dimensions of uncertainty shape the volatility and interconnectedness of green financial markets, with particular attention to the Sustainability Uncertainty Index (ESGUI) as a novel driver of asset dynamics. We employ Glosten–Jagannathan–Runkle generalised autoregressive conditional heteroskedasticity mixed data sampling and dynamic conditional correlation mixed data sampling models to analyse three representative green asset classes − environmental, social, and governance equities; clean energy stocks; and green bonds − across four uncertainty regimes, including ESGUI, climate policy uncertainty, global economic policy uncertainty, and geopolitical risk. Results show that green assets exhibit strong volatility persistence and asymmetric responses to shocks, with ESGUI emerging as the most dominant and consistent driver across markets. Moreover, uncertainty shocks significantly influence cross-asset correlations in heterogeneous ways, with ESGUI persistently increasing correlations across all asset pairs. A principal component analysis-based composite factor confirms the aggregate relevance of uncertainty shocks while highlighting heterogeneous transmission channels, particularly the resilience of green bonds as a diversification instrument. The findings emphasise the importance of adopting flexible and adaptive diversification strategies that reflect prevailing uncertainty regimes for investors, and ensuring transparent and credible disclosure to stabilise capital flows and strengthen the resilience of sustainable finance for policymakers.