Return connectedness and portfolio implications of green equities: A comparison of green and conventional investment modes

Abstract

The notable expansion of the green equity market has opened up new avenues for investment for market participants. This study looks at return connectedness, and the implications for portfolio management of green sector equities, and compares the performance of green and traditional investments. To achieve the research objectives, this study uses the TVP-VAR model along with portfolio strategies such as minimum variance portfolio (MVP), minimum correlation portfolio (MCP), and minimum connectedness portfolio (MCoP). Results demonstrate that the energy efficiency sector leads all others in information spillover while the bio/clean fuels sector is the largest net information absorber. Overall, energy efficiency, water, recycling and green building are found to be closely connected sectors, whereas bio/clean fuels, healthy living, natural resources and advanced materials are the least integrated industries in the system. However, a dynamic analysis demonstrates that inter-sector connectedness is time-varying and event-dependent. The MVP approach excels in the full and pre-COVID-19 sample, whilst the MCoP outperforms other methods in the post-COVID-19 scenario. In general, the portfolio exercise shows that green portfolios outperformed commodities but underperformed conventional equity and cryptocurrency portfolios. In contrast, following the COVID-19 pandemic, green portfolios have shown a greater return performance than all other conventional portfolios. The findings not only provide valuable insights to investors and policymakers in the effective management of investments and the green equity market, but also aid the achievement of objectives of environmental policies such as SDGs and the Paris Agreement.