Extreme contributions of conventional investments vis-à-vis Islamic ones to renewables

Abstract

The growing global awareness of social and environmental issues has led investors to prioritize sustainable investments. This study examines the relationship between ten Islamic and conventional sector indices, which include stocks screened for environmental, social, and governance (ESG) factors, across three energy-related fields: renewable energy, energy efficiency, and oil equipment and services. Using a quantile cross-spectral approach, this research finds a high level of long-term synchronization among all energy-related sectors and indices. However, as markets shift from bearish to bullish, the current relationship between energy-related sectors and Islamic and conventional indices weakens. To support the findings in this research and investigate potential financial implications, this investigation applies a causality-in-quantiles approach. The research in this study shows a bidirectional causal relationship between conventional and Islamic indices, particularly in the energy efficiency sector during bearish market conditions. At lower tails, ESG market indices are found to cause renewable energy products, suggesting a hedging mechanism. The findings of this study assert that investments that do not possess any ESG shortcomings are imperative for effectively bolstering renewable energy companies and fostering opportunities for energy efficiency. These conclusions hold considerable ramifications for energy policymakers as they strive to devise more robust financial mechanisms that can provide substantial support to the burgeoning green sector.