Exploring the impact of geopolitical risk on green finance in asia-pacific: Challenges and opportunities for environmental policy

Abstract

The escalating geopolitical uncertainties pose significant challenges to sustainable finance, particularly in the Asia-Pacific region, where green investment is crucial for mitigating climate change. This research investigates the dynamic relationship between geopolitical risk (GPR) and green finance, focusing on its effect on the returns and volatility of renewable energy, clean energy, and green bond markets. While prior research has examined geopolitical risk’s influence on conventional financial markets, its specific effects on sustainable investments remain underexplored. This study bridges this gap by addressing the question: How does geopolitical risk shape green finance performance in Asia-Pacific? Using a quantitative research approach, we employ a time-series analysis covering the period from December 2014 to June 2024. The study integrates a Vector Autoregression (VAR) framework, standard Granger causality tests, and a Time-Varying Granger Causality (TVGC) model to capture both static and evolving relationships between GPR and green finance indices. Monthly data for key financial indicators—including the Geopolitical Risk Index, Asia-Pacific Renewable Energy Index, Asia Clean Energy Index, and Nikko AM Global Green Bond Fund—are sourced from reputable financial databases to ensure analytical rigor. Our findings reveal that heightened geopolitical risk exerts a negative impact on green asset returns while increasing their volatility. Notably, clean energy investments exhibit the highest sensitivity to geopolitical disruptions, suggesting that policy instability and trade tensions significantly deter investor confidence in sustainable sectors. Time-varying analysis further demonstrates that the strength of this relationship fluctuates over time, intensifying during periods of global political crises. The implications of this study are profound. Policymakers must develop robust regulatory frameworks to shield green finance from geopolitical shocks, while investors should incorporate geopolitical risk assessments into their sustainable investment strategies. By providing empirical insights into the vulnerabilities and resilience of green finance in uncertain geopolitical climates, this research enhances the theoretical understanding of sustainable finance and offers actionable recommendations for financial institutions, regulators, and investors. Ultimately, our study underscores the necessity of policy-driven financial mechanisms to ensure the stability and growth of green finance in an increasingly volatile global landscape.