Wavelet-quantile analysis of the nexus between economic policy uncertainty and sustainable markets: An ESG context

Abstract

This study explores the dynamic relationship between Economic Policy Uncertainty (EPU) and sustainable markets within an Environmental, Social, and Governance (ESG) framework, using four key ESG indices: Carbon Efficient Index and Fossil Fuel Free Index representing environmental concerns, the Socially Responsible Index for the social aspect, and the Institute Corporate Effectiveness Index for corporate governance. The study applies Wavelet Quantile Correlation (WQC) method, as well as, it introduces the Time-Varying Wavelet Quantile Causality (TVWQC) as a novel methodological approach. The results reveal that short-to medium-run periods (4–32 days scale) exhibit positive correlations between EPU and environmental indices, while negative correlations dominate in the long-run (64–128 days scale). Conversely, the social and governance indices are largely negatively correlated with EPU across all time frames, suggesting greater sensitivity to EPU. Moreover, the causality analysis confirms the significant short-run causal effects of EPU on all indices, particularly environmental markets. Yet, over time, these indices relatively recover from initial shocks, while social and governance indices remain influenced by long-run EPU. These findings contribute to the understanding of how EPU influences different aspects of ESG markets, and highlight the importance of policy stability for promoting long-run sustainable investments within the ESG markets.