Navigating environmental concerns and geopolitical risks: A study on green sukuk and Islamic equities amid climate crisis and the Russia-Ukraine conflict

Abstract

Investors seek safe haven assets for portfolio diversification and risk management because climate change and environmental markets have recently become the concern of many governments, companies, households, politicians and academics. Therefore, this study examines the dynamic connectedness between sukuk (Islamic bonds), green sukuk, Islamic equities, and Islamic green markets for equity by comparing both in the short and long terms spillover and examining the effects of uncertainty factors on dynamic connectedness at different spillover horizons. In the short run, green Islamic equities, green sukuk and sukuk are net transmitters, and Islamic equities are net receivers. However, in the medium and long term, the behavior of these markets is vice versa. We then find the determinants of connectivity levels using macroeconomic conditions. We find that some of the determinants that cause return spillover in the short and medium term are quite different from those that cause return spillover in the long term. The results of portfolio analysis show that green sukuk are effective in hedging the risks of Islamic equities, green Islamic equities and sukuk. The performance characteristics of these potential diversification and risk mitigation benefits have been robust and enduring during the Covid-19 pandemic and the Russia-Ukraine War. Finally, our findings are of great importance to investors interested in ethical investing and for policymakers to maintain a healthy and resilient financial system.