Knowledge and risk sources in the U.S. natural gas market: ESG uncertainty and climate-related factors

Given the shift in global financial governance towards sustainability, exploring the effects of nonfinancial factors on energy markets is vital for climate action and energy sector sustainability. This paper examines the U.S. natural gas market and identifies ESG-related uncertainty indices (ESG-GEW, ESG-GGW, and ESG-US) and climate-related indicators (Transition Concern, Transition Risk, Physical Concern, and Physical Risk) as potential influencing factors. Using linear and nonlinear tests, we empirically analyse the effects of these two types of factors on natural gas spot returns. First, the SupWald test results show that only ESG-GEW and ESG-GGW have a significant linear effect on U.S. natural gas, whereas ESG-US and climate-related factors have no significant linear effects. This finding indicates that ESG-GEW and ESG-GGW are more likely to influence the natural gas market linearly by altering market expectations about the long-term sustainability of the energy industry. Furthermore, the quantile-based test reveals that the effects of these factors on U.S. natural gas returns exhibit notable nonlinearity. All factors except climate-related physical risk demonstrate significant conditional effects across different quantiles of returns. This finding reflects that risk preferences of market participants vary across extreme market-movement states. This research not only provides empirical evidence that can help U.S. natural gas market participants to optimize their investment decisions and assist policymakers to improve energy financial risk regulation but also validates the role of SDG-driven sustainable development practices in the energy finance sector.