Understanding dynamic return connectedness and portfolio strategies among international sustainable exchange-traded funds

The rapid growth of sustainable investing has led to the global expansion of environmental, social, and governance (ESG) investment products. Existing literature on sustainable investing focuses primarily on corporate social responsibility theory and risk assessment, with relatively little research on ESG investment value and portfolio strategies. Using data from six worldwide ESG exchange-traded funds (ETFs) between 2020 and 2023, we examine return connectedness and portfolio performance by employing a time-varying parameter vector autoregressive (TVP-VAR) and portfolio approaches. The findings reveal that European ETF plays a dominant role in the worldwide ESG system due to the market size and market maturity. Specifically, the European ETF can substantially reduce portfolio volatility. Moreover, the results show that minimum variance and risk-parity portfolios outperform the other portfolio strategies during periods of geopolitical turmoil. These results provide valuable insights for improving the resilience of ESG markets and enhancing sustainable investment strategies. • EAFE ETF is a major transmitter of shocks, while China and the US are primary receivers. • ESG market connectedness intensified during COVID-19 and the Russia-Ukraine conflict. • Four portfolio strategies reveal varying effectiveness in mitigating risks and enhancing returns. • Minimum Variance and Risk-Parity Portfolios excel during geopolitical turmoil. • ESG investments highlight the importance of regional risk profiles and market conditions.