Sustainable development and investor confidence: The safe‐haven appeal of green‐bond issuing firms

Abstract This study investigates the performance of a green‐linked portfolio as a safe haven and hedge against traditional assets during periods of market turmoil, such as the COVID‐19 pandemic and the Russia‐Ukraine war. Utilizing a dynamic conditional correlation (DCC)‐generalized autoregressive conditional heteroscedasticity (GARCH) approach, the study analyzes the portfolio's correlations with global assets like SENSEX 30, BSE ESG 100, Gold, S&P Green Bond Index, and US 10‐year Treasury bonds, demonstrating its stability. [Correction added on 05 September 2024, after first online publication: In the preceding sentence, the word ‘asse’ was corrected to ‘assets’ in this version.] Our findings demonstrate that the green‐linked portfolio outperforms both individual stocks and major indices as well as traditional safe havens like gold and US Treasury bonds. The portfolio exhibits superior risk‐adjusted returns and lower volatility, particularly during crisis periods. The portfolio's strong positive correlation with the S&P Green Bond Index highlights its alignment with the broader green market. Interestingly, with a 95% hedge effectiveness, it emerged as a viable safe haven investment, surpassing gold in stability during market uncertainties. Further, forecast matrix results and VAR analysis confirm the portfolio's potential as a diversifier and safe haven asset, characterized by significant positive returns. Additionally, the SAP‐LAP framework provides clarity to stakeholders on safe‐haven options within green markets. Moreover, while green bond markets are more mature in developed economies, our results suggest that green‐linked investments in emerging markets, such as India, offer a promising avenue for investors seeking both financial returns and environmental impact. Overall, the study provides empirical evidence supporting the inclusion of green‐linked assets in diversified portfolios to enhance risk management and capture long‐term growth opportunities.