Is Carbon a new portfolio diversifier? Examining the relationship between global carbon pricing, sustainable and conventional assets

In this paper, we study the relationship between global carbon pricing and the sustainable and conventional assets using a novel measure of carbon pricing and daily data from 2014 to 2022. Given the energy transition from fossil fuel to clean energy to achieve the net-zero targets by 2050, companies and investors are increasingly facing carbon transition risks. Based on DCCs, we find that there is a rise in positive DCCs between carbon prices and the sustainable asset returns after the Paris agreement, and during the COVID period, potentially due to an increase in investors’ climate concerns. Our wavelet analysis suggests that conventional and sustainable assets have low co-movement with the carbon prices, thus providing diversification opportunities between carbon and different assets. Using TVP-VAR analysis, we find that COVID-19 and the Russia-Ukraine war had a significant impact on the systematic risks in the financial market. Carbon assets receive more shocks than they send to the other assets. Our results are important for investors, policymakers and the practitioners.