The causal relationship between green finance and geopolitical risk: Implications for environmental management

Abstract

This study investigates the time-varying causal relationship between geopolitical risk and green finance during the period of 1 March 2012-February 16, 2022. By using the novel time-varying causality testing framework, our findings shed light on the nexus between geopolitical risk and green finance in informing environmental management decisions. First, we find that time heterogeneity does exist in the causal relations between geopolitical risk and green finance. Second, geopolitical risk has a more prolonged impact on the volatility of green bonds and renewable energy than the return. Yet, geopolitical risk tends to influence the return of clean energy more persistently than volatility. Third, we observe that geopolitical risk has a more sustained impact on the return and volatility of renewable energy than clean energy. This might be due to the distinct nature of the production of clean energy and renewable energy, thereby providing implications for effective environmental management. Lastly, this paper demonstrates that the impact of geopolitical risk on the return of European clean energy has diminished since the onset of 2015. The volatility of the European clean energy sector is not affected by global geopolitical risk, underscoring the necessity of promoting the development of this sector to reduce the dependence on fossil fuels and enhance energy independence.

Keywords: Clean energy; Environmental management; Geopolitical risk; Green finance; Renewable energy; Sustainable development goals; Time-varying causality.