Environmental Sustainability in Financial Markets: Wavelet Coherence Analysis of ESG Indices and Global Risk Factors

Abstract

This study explores the dynamic interlinkages between Environmental Social, and Governance (ESG) equity indices and various global uncertainty measures, including the Economic Policy Uncertainty (EPU) Index, the Geopolitical Risk (GPR) Index, and the World Uncertainty Index (WUI). Using Wavelet Coherence analysis to capture time-frequency dynamics, the research examines how sustainable stock markets in India (Nifty100 ESG) and the United States (S&P 500 ESG) respond to periods of elevated uncertainty from 2012 to 2024. The findings reveal that co movement between ESG markets and uncertainty indices intensifies during crisis periods, particularly over shorter time scales. The strongest correlations emerge during the peak of the COVID-19 pandemic and extend into the Russia Ukraine conflict (April 2016–June 2024). Notably, the S&P 500 ESG index exhibits stronger linkages with the GPR and WUI, while the Nifty100 ESG index demonstrates leading behavior with respect to the EPU and GPR indices. These results stress upon the increasing vulnerability of sustainable financial markets to geopolitical and economic disruptions, highlighting the need to interlink climate-conscious investing with global risk assessment. This study advances the field of environmental finance by providing fresh insights into how ESG-focused markets respond to uncertainty and policy shocks.