Can We Do Well, While Doing Good? A Comparison Between Sustainable and Conventional Investments

E. Bruno, J. Längberg and G. Gavorskis

Review of Development Economics, 2025, vol. 29, issue 4, 2667-2692

Abstract: This study investigates the role of financial, ethical, and environmental factors in shaping sustainable investment decisions, with a focus on green, social, and clean energy bonds. Using a combination of econometric models, such as the Dynamic Conditional Correlation (DCC‐GARCH) model, and machine learning techniques, including XGBoost and ElasticNet, we analyze the co‐movement between sustainable and conventional asset classes, macroeconomic variables, and policy uncertainty. Our results reveal that financial motivations, driven by risk–return considerations, play a dominant role in sustainable investment decisions, while ethical and environmental factors, although recognized, are secondary drivers. Additionally, structural break analysis highlights the impact of market shifts on time‐varying correlations between asset classes. Notably, we find that policy uncertainty (EPU) does not influence short‐term sustainable asset movements but is linked to the longer‐term trends in green bond issuance, as revealed by regression and machine learning models. Our analysis further suggests that increasing sustainable assets in a portfolio can enhance returns, though at the cost of increased risk. These findings emphasize the importance of financial incentives and stable market conditions in encouraging sustainable investment. Policy recommendations include reducing uncertainty in sustainable finance markets and offering targeted incentives to promote clean energy investment, particularly during periods of market instability.

Date: 2025
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