The rapid expansion of sustainable finance has fuelled growing interest in green investments, including green bonds, Environmental, Social, and Governance (ESG) funds, and energy-efficient cryptocurrencies. While these assets are often grouped under the broader umbrella of green finance, little is known about how they interact during periods of market instability. Investors often view green bonds and ESG funds as both ethical and financially resilient investments, while green cryptocurrencies have emerged as lower-energy alternatives to traditional digital assets. Whether these investments complement one another or increase portfolio risk has remained an open question.
A new study led by Professor Sang Hoon Kang of Pusan National University investigated the interconnectedness between seven green cryptocurrencies and three major green financial benchmarks. Analysing daily market data from November 2017 to July 2024, including the COVID-19 pandemic, the researchers examined how risk is transmitted across sustainable financial markets under different market conditions. Their findings were published in Financial Innovation on 9 June 2026. “As green cryptocurrencies are getting more integrated into sustainable investment portfolios, we wanted to understand their hedging capability and how it differs from traditional green finance options,” explained Prof. Kang.
The research team used a quantile vector autoregression framework, an advanced statistical approach that captures market behaviour during bearish, normal, and bullish conditions. Unlike conventional methods that focus on average market relationships, this approach reveals how risk transmission changes during periods of extreme market stress and strong growth.
The analysis uncovered a pronounced U-shaped pattern in market connectedness. During relatively stable periods, interactions between green cryptocurrencies and traditional green assets remained moderate, allowing investors to benefit from diversification. However, connectedness increased sharply during both market downturns and market booms, causing assets to move more closely together and reducing the effectiveness of diversification.
Portfolio analysis showed that traditional green assets offered only limited protection against volatility originating in green cryptocurrencies. Among the digital assets studied, Cardano and Stellar were the strongest transmitters of volatility across the sustainable finance ecosystem. By contrast, green bonds, clean energy indices, and ESG investments consistently acted as net receivers of volatility, absorbing shocks generated elsewhere in the market.
The findings challenge the common assumption that green financial assets function as reliable safe havens. Although green bonds and ESG investments are often regarded as defensive portfolio components, they remained vulnerable to shocks originating in green cryptocurrency markets, particularly during periods of heightened uncertainty.
The study also demonstrated that major global events strengthened these market connections. Interconnectedness rose significantly during the COVID-19 pandemic and remained elevated during subsequent geopolitical disruptions, reducing diversification benefits and increasing the spread of risk across sustainable asset classes.
As green cryptocurrencies become increasingly integrated into investment portfolios, recognising these asymmetric risk spillovers will be essential. “While investors may need to adopt more dynamic portfolio strategies, regulators should consider measures aimed at monitoring and managing systemic risks associated with emerging green digital assets,” said Prof. Kang. The findings provide new evidence that sustainability-focused investments are not immune to financial contagion and could help investors, fund managers, and policymakers develop more effective risk monitoring and regulatory frameworks for the evolving green finance ecosystem.
More information: Walid Mensi et al, Are green bonds and green energy markets hedges for green cryptocurrencies? A quantile VAR approach, Financial Innovation. DOI: 10.1186/s40854-025-00868-8
Journal information: Financial Innovation Provided by Pusan National University