Bridging sustainable finance, AI, and clean technology amid economic shocks: How are they connected in median and extreme conditions?
Journal:
Journal of environmental management
Published Date:
Jul 5, 2025
Abstract
We investigate the intricate relationships between sustainable markets, artificial intelligence (AI), and clean technology, focusing on their contributions to investment and risk management. Employing the Quantile-on-Quantile (QQ) connectedness framework, it analyzes the dynamic interactions across these sectors under varying market conditions, from typical scenarios to extreme events. Unlike traditional connectedness models that assume linear and symmetric relationships, the QQ approach reveals how shocks in one asset class at a specific quantile affect others across their entire distribution, offering a richer understanding of tail-risk behavior and asymmetric spillovers. We cover the period from 2018 to 2023, characterized by major economic disruptions such as the COVID-19 pandemic and the Russia-Ukraine conflict. Findings show that market connectedness is relatively low at the median and extreme lower quantiles, suggesting limited sectoral interaction during stable or moderately adverse conditions. However, at the extreme upper quantile, connectedness rises significantly by over 40 %, revealing stronger co-movement during turbulent periods. Dow Jones sustainability indices (DJSI) and Dow Jones ESG Leaders Index (DJESG) emerge as key transmitters of systemic risk, functioning as both stabilizing assets and early warning indicators. In contrast, the S&P Green Bonds Index (SPGB), while offering diversification benefits, is less effective for direct downside risk mitigation. Portfolio optimization results show that the Minimum Connectedness Portfolio (MCoP) delivers the best trade-off between return, diversification, and systemic risk control. It achieves the highest Sharpe ratio, outperforming the Minimum Correlation Portfolio and the Minimum Variance Portfolio. We provide actionable insights for investors, asset managers, and policymakers navigating sustainable finance amid growing environmental and economic uncertainty.
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