Sailing towards sustainability: Connectedness between ESG stocks and green cryptocurrencies

Using the TVP-VAR model, this study examines the connectedness between green cryptocurrencies and the individual components of the ESG (Environmental, Social, and Governance) stocks. Our sample period runs from November 10, 2017, to September 12, 2023. Our results indicate a moderate level of return and volatility transmission between green cryptocurrencies and ESG stocks. In line with theoretical argumentation, cryptocurrencies act as receivers of both return and volatility spillovers from the system, while stocks are the main transmitters. Our dynamic results show a substantial rise in total return and volatility connectedness of the system during the outset of the COVID-19 and Russia-Ukraine conflict, suggesting that global event amplifies the system connectedness. Moreover, the time-varying net results also exhibit a similar pattern, where the role of each asset changes during the turmoil period. Finally, our portfolio analysis suggests that green cryptocurrencies provide diversification to green stocks during both normal and turbulent periods. Additionally, they also emerge as effective hedges against ESG stocks across all market conditions. However, the hedge ratio increased during the COVID-19 pandemic, suggesting hedging becomes more expensive during turbulent periods. Our findings provide valuable insights for portfolio managers and policymakers regarding asset allocation, risk management, and the evolving dynamics between green cryptocurrencies and ESG stocks in an increasingly interconnected financial landscape.