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Sustainability: Climate and Economic Policy Uncertainty in Sustainable Investment Strategy - Evidence From Wavelet Co
Abstract
The present research analyzes the interaction between policy uncertainties, as captured by Climate Policy Uncertainty (CPU) and Global Economic Policy Uncertainty (GEPU), and key sustainable finance indices such as Global Green Bond Index (GB), S&P Global 1200 ESG Index (ESG), S&P 500 Green Global Index (SPC), S&P Global 1200 Carbon Efficient Index (CF), and S&P Global 1200 Fossil Fuel-Free Index (FF). Using the Wavelet Coherence Analysis technique, this research has managed to identify that each of these sustainable finance indices reacts to uncertainty in different ways, with varying levels of volatility between 2010 and 2023. These findings clearly indicate that while CPU impact is random and acute around key climate change policy deadlines such as COP21, the Green Deal in Europe, and COVID recovery policies for sustainable development, the impact of GEPU is consistent and widespread in all sustainable indices analyzed, thus firmly establishing macroeconomic uncertainty's key and overarching impact on market sustainability and performance in sustainable finance instruments and markets. Phase difference analysis also clearly confirms and supports that sustainable finance markets tend to react and respond to uncertainty signals in general and, more specifically, to those of GEPU, thus clearly and conclusively determining that macroeconomic policies are again and again key and leading determinants of sustainable performance in green and ESG assets. These findings and research conclusions clearly indicate that sustainable markets are certainly not and do not remain insulated or unaffected by macroeconomic conditions in general in today's interdependent and interconnected world; rather, all sustainable markets react and respond to uncertainty in different and varying ways depending on key uncertainties in varying and different instances and circumstances. This research study has provided significant research insights and added substantially to the emerging and growing research and literature on sustainable markets during and in conditions of economic and financial instabilities. This particular research study has also helped and supported portfolio and sustainability managers, as well as climate change and sustainability professionals and policymakers, to better and properly recognize and factor in key uncertainties in sustainable assets during long-term sustainable and sustainable finance investments and transactions.
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