Hedging climate risk: The role of green energy exchange-traded funds

Libo Yin, Jier Zhang, Wensheng Wang and Hong Cao

Research in International Business and Finance, 2025, vol. 77, issue PA

Abstract: This study identifies the hedging role of green energy ETF (GETF) funds on climate risk. By employing the “bag-of-words” approach to quantify the uncertainty of underlying ETF assets and mapping them to the ETF level, we find that China’s GETFs effectively hedge climate risk. Specifically, these hedging effects are particularly pronounced in portfolios constructed by opportunity and regulatory uncertainty, whereas those of physical uncertainty are negligible. Furthermore, this hedging capability is primarily in the short and medium terms and is associated with increased climate risk. Notably, GETFs perform excellently in environments with low levels of liquidity, volatility, and non-fundamental trading activities. Overall, owing to their risk-return profile, GETFs can be a rewarding alternative to BETFs for investors in hedging climate risk.

Keywords: Hedge portfolios; Climate risk; Green energy exchange-traded funds; Textual analysis (search for similar items in EconPapers)
JEL-codes: G11 G18 Q54 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:77:y:2025:i:pa:s0275531925001552

DOI: 10.1016/j.ribaf.2025.102899

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