Climate changes pose systematic risks to global financial stability making risk management a critical pillar of sustainable finance. In particular, we explore the role of climate bonds as safe havens in times of financial turmoil. Therefore, we employ an advanced technique – the Transfer Entropy to assess the directionality of the relation between conventional stock markets and climate bonds and see how their safety abilities compare with gold. Using a long-time frame spanning from 2015 to 2022 that covers two recent worldwide crises: (i) the pandemic and (ii) Russian invasion of Ukraine we demonstrate that climate bonds are superior to gold in hedging downside risk as given by the higher magnitude of the negative directionally between these assets. However, both assets were found to be strong safe havens in times of falling prices. The study of Prof. Sónia Bentes, Ph.D.,  highlights the potentialities of a sustainable finance instrument in hedging the downside risk of traditional markets.

Sónia Bentes, Ph.D., is Professor of Finance at the Lisbon Accounting and Business School (ISCAL) at Politécnico de Lisboa, partner of the U!REKA European University.