How does the time-varying dynamics of spillover between clean and brown energy ETFs change with the intervention of climate risk and climate policy uncertainty?

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This paper studies how climate change risks and uncertainty in climate policies impact asset pricing. We analyze this issue through the interaction mechanism between clean and brown energy ETFs. We choose energy ETFs for their broader role in the transition phase as investment flows into clean energy ETFs with rising climate change risks. The paper analyzes the changing dynamics of interconnectedness between clean and carbon-energy assets as they differ in transmitting and receiving shocks between normal versus crisis periods in the backdrop of climate risk. Using daily data of clean and brown energy instruments with the TVP-VAR framework, we show that the asymmetric connectedness between the two instruments increases during crises. Specific clean and brown instruments are either net givers or receivers, and the climate risk and policy uncertainty variables are net receivers throughout the study periods. The results bring newer insights into interconnectivity, which have significant implications for market participants, especially for policymakers strategizing risk mitigation policies and the fund management industry for broader diversification and eco-savvy investors investing in eco-efficient portfolios offering better risk-return tradeoffs.