Dynamic causality between ESG indices and traditional asset classes: insights from global crises using the CWTC method

Purpose This study aims to examine the causality relationship between environmental, social and governance (ESG) indices and traditional asset class indices across six countries with diverse economic conditions, utilizing the Continuous Wavelet Transform-Based Granger Causality (CWTC) method. The study covers the period from late 2014 to late 2024, depending on the availability of ESG index data for each country, and includes developing countries (China and Taiwan) and developed countries (UK, USA, Australia and Japan). The research focuses on periods marked by global crises, such as the COVID-19 pandemic and military conflicts. Design/methodology/approach The study employs the CWTC method to analyze causality between ESG indices and traditional asset class indices, covering various periods, including those of heightened volatility due to global events. The analysis spans six countries, including China, the USA and other significant economies, to identify patterns in the relationship between ESG and traditional financial markets. Findings The results demonstrate a consistent causality from ESG indices to traditional asset class indices in the USA and China across all analyzed periods. In contrast, other countries exhibit stronger causality in the short and medium term. This suggests the dynamic integration of ESG and traditional markets, with ESG information influencing market behavior, particularly in times of crises. Originality/value This study contributes to sustainable investing research by analyzing the causality between ESG indices and traditional asset class indices across six countries. With growing concerns about climate change and investor preference for sustainability, the findings underscore the integration of ESG factors into financial markets. By using the CWTC method, the study captures dynamic causal relationships, offering practical insights for investors and policymakers in optimizing sustainable investment strategies.