Climate policy initiatives, green finance, and carbon risk interconnectedness

Abstract

This paper assesses the role of climate policy initiatives and carbon risk in shaping green finance. It also explores the evolving dynamics of interconnectedness with green finance against the backdrop of the energy crisis, weather anomalies, and the escalating risk of environmental degradation. The study uses daily data from January 01, 2016, to March 31, 2023. It implements a quantile VAR-based connectivity technique to show that shocks are transmitted from green finance and received by policy initiatives and carbon risk at extreme quantiles rather than the mean. The interconnectivity strengthens during the health crisis and the war periods. The research findings substantially impact risk mitigation strategies and portfolio diversification, especially considering investors’ transition toward alternative energy sector investments.