Evaluating Growth and Crisis Risk Dynamics of Sustainable Climate Exchange-Traded Funds

Abstract

This study evaluates the dynamic risk spillovers and interconnectedness of environmental, social, and governance exchange-traded funds (ESG-ETFs) markets during two significant geopolitical conflicts, the Israel–Palestine and the Russia–Ukraine conflicts, alongside an extended analysis of the full period from July 2020 to October 2024. We investigate how crises transmit risks to the market by using the Total Connectedness Index (TCI) and net spillover measures. Our findings reveal a consistently high level of market interdependence. TCI values rose from 65.71% during the Israel–Palestine conflict to 67.28% in the full sample, indicating intensified risk sharing among markets as crises evolve. The markets “Deka MSCI World Climate Change ESG UCITS ETF (D6RP)” and “Amundi MSCI World SRI Climate Net Zero Ambition PAB UCITS ETF EUR Acc (XAMB)” emerge as prominent risk transmitters across all periods, actively spreading volatility throughout the system in both the crisis. In contrast, the markets “Amundi MSCI World Climate Transition CTB—UCITS ETF DR—EUR-C (LWCR)” and “Franklin STOXX Europe 600 Paris Aligned Climate UCITS ETF (PARI)” are primary risk receivers, absorbing a substantial portion of the instability in the Israel–Palestine and Russia–Ukraine conflicts. These dynamics underscore the shifting roles of financial markets during prolonged geopolitical tensions. These findings highlight the necessity of monitoring global markets, particularly during geopolitical shocks, to mitigate systemic risk and effectively navigate financial instability.