Environmental, social and governance (ESG) investing and Indian capital market indices: dynamic connectedness and risk management strategies

Abstract

Purpose – This study examines the dynamic connectedness and volatility spillovers between Indian Environmental, Social and Governance (ESG) indices, clean energy indices, sectoral indices and broad-based market benchmarks. It seeks to understand how systemic shocks transmit across these assets during normal and crisis periods, with implications for portfolio management and sustainable finance in emerging markets. Design/methodology/approach – The analysis employs the Time-Varying Parameter Vector Autoregressive (TVP-VAR) extended joint connectedness (EJC) framework to capture directional spillovers, complemented by the Dynamic Conditional Correlation–Generalized AutoRegressive Conditional Heteroskedasticity (DCC-GARCH) model for bilateral hedge ratios. Robustness is assessed through Quantile VAR (QVAR) using the Hannan–Quinn criterion. Finally, portfolio allocation strategies are evaluated using the Minimum Connectedness Portfolio (MCoP), benchmarked against the Minimum Variance Portfolio (MVP) and Minimum Correlation Portfolio (MCP). Findings – Results indicate that ESG 100, BSE ESG, CARBONEX and GREENEX act as consistent net transmitters of volatility, while sectoral indices such as FMCG, DIGITAL and REALTY serve as diversifiers with low connectedness. Spillover intensity rises markedly during the COVID-19 pandemic and the Russia–Ukraine conflict, underscoring the vulnerability of ESG-linked assets to crises. MCoP consistently outperforms MVP and MCP in minimizing systemic risk. Robustness checks confirm similar patterns but reveal quantile-dependent asymmetries in spillover behavior. Practical implications – For investors, the findings highlight the need for dynamic portfolio strategies that balance ESG integration with diversification through sectoral assets in emerging markets. For regulators, the results emphasize the importance of strengthening ESG disclosure and oversight to reduce systemic vulnerabilities. Originality/value – This is one of the first studies to systematically investigate ESG–market connectedness in India, a high-growth emerging economy. By integrating connectedness measures with portfolio optimization, the study provides novel insights into how sustainable finance interacts with systemic risk, offering guidance for investors, regulators and academics alike.