Return and volatility spillover among green finance, sustainable and Islamic investments: evidence for environmental sustainability via financial convergence

What is it about?

This study examines the dynamic connectedness between green finance, socially responsible investments, Islamic investments, and gold. It aims to understand how these connections contribute to environmental sustainability through effective management of green investments, particularly during periods of market turbulence. The study employs time-varying parameters vector auto regressions (TVP-VAR) approach based on generalized forecast error variance decomposition (GEVD). This methodology captures the evolving nature of return spillovers and interconnectedness between the assets studied, especially during the COVID-19 pandemic. The findings suggest that the connectedness among the assets vary over time with a notable heave during the pandemic and a decline during the 2015-2016 oil crisis. Shariah-compliant assets, green bonds, and clean energy investments, and are identified as net recipients of shocks, whereas gold, Islamic stocks and sustainable investments act as net transmitters of shocks. This distinction in asset behavior highlights their relatively low level of connectedness throughout the time-varying patterns. Investors can apply these insights and enhance their portfolios to achieve diversification by integrating Islamic investments and Sharia-compliant assets. They can construct portfolios that are both well diversified and aligned with Islamic principles. Additionally, the findings provide crucial guidance for improving diversification within Islamic investments. The research is limited by its focus on specific asset classes and the limited period. The findings highlight the importance of understanding dynamic return spillovers and connectedness for investors and policymakers. By recognizing patterns such as net pairwise connectedness between various asset pairs, they can develop strategies to improve portfolio diversification and hedging. This approach helps create resilient investment portfolios aligned with sustainability goals. This study contributes to the growing field of sustainable finance by demonstrating how different investment options, including green bonds and Islamic investments, respond to market shocks. It emphasizes their role in optimal portfolio construction, supporting socially responsible investment strategies and advancing environmental sustainability.

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