Climate Risk and Sustainable Investment in Asia

Abstract

This study conducts an empirical analysis of the impact of climate risk on Environmental, Social, and Governance (ESG) investments in Asia. Using monthly data from 2015 to 2022 for 11 Asian countries and applying wavelet coherence analysis with a panel Auto-regressive Distributed Lag Model (ARDL) cointegration approach, the study concludes that (1) ESG and stock market returns are positively correlated during economic turmoil in China and Malaysia; (2) climate risk positively influences ESG returns, suggesting that it enhances returns during uncertain times rather than having a detrimental effect; (3) returns on conventional assets are negatively impacted by climate risk; and (4) ESG investments serve as an effective hedge against climate risk and provide a sound strategy for portfolio diversification in the Asian market.