Abstract
By analyzing the connectedness of environmental, social, and governance (ESG)–rated firm returns with green bond, conventional sukuk, and green sukuk markets, this study extends prior work on sustainable and Islamic finance. Using weekly data from April 2020 to December 2024, we find that ESG returns have a large effect on conventional sukuk and green sukuk returns. ESG impacts green sukuk, green bonds, and conventional sukuk more in the extreme tails of returns. Next, we identify the determinants of connectedness between ESG returns and sukuk and green bond returns. The connectedness increases during economic downturns. ESG’s impact on green bonds rises when market volatility is higher. However, the connection between ESG and green sukuk is enhanced when economic policy uncertainty and geopolitical risks increase. These findings have significant implications for policy makers. The connectedness between ESG indexes and green bonds increases during periods of market volatility, which we interpret as showing greater financial integration of green bonds, and the linkage of ESG indexes with green and conventional sukuk strengthens in the presence of geopolitical and economic uncertainty, to which they are very sensitive.