Indore (Madhya Pradesh): Green bonds have emerged as the most effective financial instrument for simultaneously mitigating portfolio risk and addressing climate concerns.
According to a study by Prof. Udayan
Sharma and Prof Kousik Guhathakurta of IIM Indore, published in the Journal of Environmental Management (2025). The research is among the most comprehensive global analyses of green assets to date.
The study assessed whether green financial assets can act as both hedges for investors and tools for climate risk mitigation. Researchers analysed green bonds (S&P Green Bond Index), clean energy assets (WilderHill Clean Energy Index), and clean cryptocurrencies (Ripple, Stellar) alongside conventional bonds, conventional energy assets, and “dirty” cryptocurrencies like Bitcoin and Litecoin. Data spanned 11 years (August 2014–September 2025) across 14 Global Equity Portfolio indices, covering frontier, emerging, developed, and global markets.
Using advanced methods including volatility spillover analysis, hedge and safe-haven tests, and out-of-sample portfolio optimisation, the study found that while no asset consistently acted as a full hedge, only green bonds and conventional bonds significantly reduced portfolio volatility and downside risk. Stability and low volatility, the researchers note, are more important than simple correlation benefits for long-term portfolios.
Crucially, green bonds provide portfolio protection similar to conventional bonds while directly supporting climate risk mitigation—making them unique among green assets. In contrast, high-volatility green assets such as clean energy stocks and clean cryptocurrencies should not be overrelied upon, particularly when used mainly for sustainability signalling rather than robust risk management.
The findings carry clear implications for investors, fund managers, and corporate treasuries. Institutions seeking climate-aligned investments without compromising financial stability should prioritise green bonds. For policymakers and regulators, the study underscores the need to develop transparent and robust green bond markets, reinforcing their role in sustainable growth and financial resilience.
The research adds a data-driven framework for integrating green assets into modern portfolios, providing actionable insights amid rising climate and market uncertainties, and strengthens the global case for green finance as both a financial and environmental stabiliser.
