Green and innovative assets in times of uncertainty: A portfolio perspective for environmental financial management

Sustainability and innovative assets, including technology stocks, blockchain- and AI-related investments are increasingly emerging in the contemporary investment landscape. Despite their growing importance, the interconnectedness and risk dynamics between these asset classes, especially under varying market conditions, remain underexplored. Combining quantile-on-quantile connectedness analysis with quantile-on-quantile regression techniques and incorporating global uncertainty factors such as the VIX and Financial Stress Index (FSI), this study investigates the market state-dependent and tail risk connectivity between five sustainability and seven innovative assets. Additionally, the DCC GARCH R 2 decomposed connectedness approach and multivariate portfolio analysis are employed to provide comprehensive insights into spillover effects and optimal allocation strategies. A strong connectedness between sustainability and most innovative assets is found, particularly during extreme market conditions. Notably, the Blockchain index exhibits unique resilience and lower integration with ESG indices, often acting as a net transmitter of shocks, especially during market downturns. The study also reveals that financial stress and stock market volatility significantly moderate these relationships, highlighting the importance of considering such factors for robust investment strategies. The findings suggest that sustain ability assets can serve as safe havens, while blockchain assets may offer diversification benefits due to their lower interconnectedness with ESG markets. This research underscores the need for dynamic asset allocation strategies that adapt to evolving market conditions and interconnectedness.