Green bonds and ESG stocks as safe haven or hedging asset for other financial assets

Abstract

Climate change is posing new challenges to global sustainability, which attracts greater attention from fund managers’ and investors’ decisions to invest in environmental, social, and governance (ESG) aspects. Investing in financial assets, however, is subject to risks and volatility and requires sufficient knowledge to make decisions. This study investigated the potential of green bonds and ESG stocks as safe haven assets or as a hedge against other financial assets using daily data since January 2014 to November 2022 with DCC-GARCH model. The result indicated that ESG stocks and green bonds are safe havens for several other financial assets and safe havens during periods of high geopolitical risk. On the other hand, only ESG stocks were qualified as a hedge for conventional bonds. A portfolio that combines green bonds and ESG stocks with other financial assets can minimize risk, particularly the risk associated with financial assets that are not climate resilient. JEL Classification: G11, G15