Green finance and renewable energy move in sync when uncertainty strikes

When the world wobbles, green markets wobble together. That is the headline finding of a new study published in Humanities and Social Sciences Communications, in which Windijarto Windijarto and Muzammal Ilyas Sindhu, both affiliated with the Faculty of Economics and Business at Universitas Airlangga in Surabaya, Indonesia, tracked how green financial markets and renewable energy assets move in tandem under uncertainty. Their answer to a question that has preoccupied sustainable investors for a decade — do green bonds, clean energy stocks and ESG funds hedge each other, or do they sink together? — is nuanced, technically elegant and, for portfolio managers, potentially worth real money.

The research arrives at a moment when the stakes could hardly be higher. Trillions of dollars now flow through instruments marketed as sustainable, from green bonds issued by governments and corporations to exchange-traded funds screening companies for environmental, social and governance performance. Yet these markets have been battered by a rolling series of shocks: the pandemic, an energy crisis, inflation spikes and a constant drumbeat of regulatory revision. Understanding whether uncertainty ripples through green markets in unison or strikes them unevenly is central to the promise that sustainable investing can diversify risk rather than concentrate it.

To answer the question, the authors deployed a technique called wavelet coherence analysis, a method borrowed from signal processing that has become one of the most powerful tools in empirical finance. Traditional correlation statistics offer a single number describing how two assets move together over an entire sample period. Wavelet coherence goes far deeper. It decomposes financial time series into cycles of different lengths — short-term fluctuations lasting a few months, medium-term swings spanning a year or two, and long-term trends stretching across the whole dataset — and then measures how strongly two series co-move within each cycle at each point in time. The result is a two-dimensional map, with time running along one axis and frequency along the other, revealing episodes of intense synchronization and periods of divergence that a single correlation coefficient would average away into invisibility.

The empirical material consisted of monthly data from November 2023 to October 2026, a window deliberately chosen to capture distinctive market conditions. The authors examined the co-movement between a set of uncertainty indices and a family of green and conventional assets: the world energy index, clean energy equities, ESG equity markets, and bond markets. Two uncertainty gauges took center stage. The first was an energy uncertainty index, designed to capture turbulence in energy markets themselves. The second was an ESG uncertainty index, a measure of how murky the sustainability landscape has become — how much doubt surrounds the credibility of sustainability policies, the reliability of ESG ratings and the pace of the transition to a low-carbon economy.

The findings on energy uncertainty are striking for their heterogeneity. The energy uncertainty index shows strong co-movement with both equity markets and energy markets, but the strength and direction of that co-movement shift across time horizons and market regimes. In some periods, energy uncertainty and asset prices move in lockstep; in others, the relationship loosens or even reverses. This is precisely the kind of time-varying behavior that wavelet coherence is built to expose. For investors, the implication is that energy uncertainty is not a monolithic risk that can be diversified away with a static allocation. Instead, it demands sector-specific and regime-specific responses: a portfolio that hedges energy risk well in calm markets may fail badly when turbulence strikes, and the tools that work over short horizons may behave differently over long ones.

The ESG uncertainty index tells an even more consequential story. The authors find strong co-movement between ESG uncertainty and the world energy index, clean energy equities and ESG equity markets. In plain terms, when doubt about the credibility of sustainability policies rises, green assets respond together — and they respond strongly. The interpretation offered by the researchers is that green markets are acutely sensitive to what they call regulatory credibility and transition risk. Clean energy companies depend on subsidies, mandates and carbon pricing for their business models; ESG funds depend on the integrity of the ratings and disclosure frameworks that underpin their mandates. When the policy landscape becomes murky — when governments waver on climate commitments, when rating agencies disagree, when disclosure rules shift — investors cannot easily tell which green assets will benefit and which will suffer, and the whole sector moves as one.

That synchronized sensitivity cuts both ways, and this is where the study turns uncertainty into opportunity. The strong co-movement between ESG uncertainty and green assets means that these markets offer limited diversification against each other in the short run: a portfolio of clean energy stocks and ESG funds may look diversified on paper but behave like a single bet on policy clarity. Yet the same analysis reveals that co-movement is not uniform across all horizons or all market conditions. Bond markets, in particular, show limited co-movement with the uncertainty indices, suggesting that fixed-income instruments — including green bonds — may retain diversification value that equities lack. The authors conclude that the sector-specific patterns of co-movement call for tailored diversification strategies rather than one-size-fits-all allocations, and that investors should optimize asset allocation with the time-varying nature of market relationships firmly in view.

For fund managers, the practical playbook that emerges is concrete. Asset allocation decisions should incorporate uncertainty gauges — both energy and ESG — as leading indicators rather than afterthoughts. When ESG uncertainty is elevated, equity-heavy green portfolios are exposed to synchronized drawdowns, and shifting weight toward instruments with weaker co-movement, such as bonds, may preserve capital. When policy credibility is high and uncertainty low, the relationships among green assets loosen, and the diversification benefits of holding a spread of clean energy and ESG positions strengthen. The time-frequency maps produced by wavelet coherence give managers a way to monitor these shifts continuously rather than discovering them in the wreckage of a crisis.

For policymakers, the message is arguably the most important one in the paper. The finding that green markets co-move strongly with ESG uncertainty implies that wavering or inconsistent sustainability policy is itself a financial risk — one that propagates directly into the cost of capital for clean energy companies and the stability of ESG funds. Credible, stable and clearly communicated climate policy would not only advance environmental goals but also reduce the synchronized volatility of green markets, lowering the risk premium that investors demand and making the transition cheaper. Conversely, policy reversals and regulatory U-turns do not merely create political noise; they transmit measurable shocks through the entire sustainable finance ecosystem.

The study is not without boundaries, and the authors are careful about what their method can and cannot claim. Monthly data limit the resolution of very short-term dynamics, and wavelet coherence identifies co-movement without by itself establishing causation — the maps show when and at what frequencies markets move together, not which market drives which. The sample window, though rich in distinctive regimes, is finite. Yet as a demonstration of how uncertainty linked to sustainability and policy credibility shapes cross-market relationships, the research offers a template for a new generation of sustainable finance analysis. In a field where the difference between a hedge and a hidden concentration of risk can decide the fate of trillions, seeing the full spectrum of co-movement — across time, across frequencies and across market regimes — may be the most valuable form of clarity available.

Subject of Research: Green finance

Article Title: From uncertainty to opportunity: exploring the co-movement among green financial markets and renewable energy sector via wavelet coherence approach

Article References: Windijarto, W., & Sindhu, M. I. (2026). From uncertainty to opportunity: exploring the co-movement among green financial markets and renewable energy sector via wavelet coherence approach. Humanities and Social Sciences Communications. https://doi.org/10.1057/s41599-026-09406-y

Image Credits: AI Generated

DOI: 10.1057/s41599-026-09406-y

Keywords: uncertainty, opportunity, exploring, co-movement, green, financial, markets, renewable, energy, sector, wavelet, coherence