Navigating the Green Frontier: Dynamic Risk and Return Transmission Between Clean Energy ETFs and ESG Indexes in Emerging Markets

Mariem Bouzguenda () and Anis Jarboui
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Mariem Bouzguenda: Faculty of Economics and Management of Sfax, University of Sfax, Sfax 3018, Tunisia
Anis Jarboui: Department of Finance and Accounting, University of Sfax, Sfax 3018, Tunisia

JRFM, 2025, vol. 18, issue 10, 1-25

Abstract: This study is designed to investigate the dynamic risk transmission processes between clean energy ETFs and ESG indices in the BRICS countries—Brazil, India, China, and South Africa—while excluding Russia due to the lack of consistent data availability during the study period, which coincides with the Russia–Ukraine conflict. The analysis is conducted on daily data obtained from DataStream, spanning from 27 October 2021 to 5 January 2024. By applying a time-varying parameter vector autoregression (TVP-VAR) modeling framework, we considered examining the global market conditions and economic shocks’ effects on these indices’ interconnectedness, including COVID-19 and geopolitical tensions. In this context, clean energy ETFs turned out to stand as net shock transmitters throughout volatile market spans, while ESG indices proved to act as net receivers. Moreover, we undertook to estimate both of the minimum variance and minimum connectedness portfolios’ hedging efficiency and performance. The findings highlight that introducing clean energy indices into investment strategies helps boost financial outcomes while maintaining sustainability goals. Indeed, the minimum connectedness portfolio consistently delivers superior risk-adjusted returns across varying market circumstances. In this respect, the present study provides investors, regulators, and policymakers with practical insights. Investors may optimize their portfolios by integrating clean energy and ESG indexes, useful for achieving financial and sustainability aims. Similarly, regulators might apply the findings to establish reliable green investment norms and strategies. Thus, this work underscores the crucial role of dynamic portfolio management in optimizing risk and return in the globally evolving green economy.

Keywords: ESG indices; clean energy indices; dynamic connectedness; minimum variance portfolio (MVP); minimum connectedness portfolio (MCoP) (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2025
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