Sustainability Uncertainty and Green Asset Returns: Implications for Financial Market Stability

Understanding the relationship between sustainability uncertainty and green asset returns is crucial for fostering financial market stability. Using a novel wavelet quantile correlation (WQC) approach, this study investigates the linkages between the environmental, social, and governance (ESG)-related uncertainty index (ESGUI) and green bond return (GBR), green stock return (GSR). We find that GBR exhibits short-term negative but medium-to-long-term positive correlation with ESGUI, indicating enhanced hedging effectiveness over the longer time. Conversely, GSR shows opposite patterns, initially positive, then turning negative, suggesting only temporary hedging benefits. During extreme events, GBR maintains a positive correlation with ESGUI, both during the COVID-19 pandemic and the Russia–Ukraine conflict, confirming the hedging effectiveness of green bonds against sustainability uncertainty. In contrast, GSR exhibits vulnerability, with negative correlations during the pandemic and complex shifting patterns during the Russia–Ukraine conflict. Moreover, the complementary wavelet-based quantile-on-quantile regression (QQR) yields results in alignment with our core conclusions, underscoring their robustness. Against the pressing backdrop of the Sustainable Development Goals, our findings yield critical recommendations for both investors and policymakers.