“Flight to Safety” Vis‐à‐Vis “Flight to Quality”: The Safe‐Haven Appeal of Green Indices in Developing Economies

ABSTRACT

Financial markets are increasingly exposed to climate‐transition shocks arising from decarbonisation policies, energy supply disruptions, and shifts in energy production. While traditional safe‐haven assets such as gold and sovereign bonds hedge monetary and financial crises, their effectiveness against transition‐related risks, particularly in emerging economies, remains unclear. This study examines whether green equity indices in an emerging market context provide alternative protection during periods of market stress. Using time‐varying dependence analysis across major global and regional crises, including the COVID‐19 pandemic and the Russia‐Ukraine conflict, we show that green assets behave differently from conventional safe havens. Green indices exhibit weak and regime‐dependent relationships with gold, sovereign bonds, oil, and natural gas, while maintaining a strong and persistent relationship with the S&P Green Bond Index, highlighting the increasing integration of sustainable financial markets. We further identify significant spillovers from global green bond markets, indicating increasing integration of domestic and international sustainable finance. Portfolio evidence suggests that green‐focused allocations incorporating the S&P Green Bond Index offer superior risk‐reduction benefits and more stable portfolio performance than traditional alternatives. The findings indicate that green financial assets provide meaningful diversification benefits and portfolio resilience, particularly in emerging financial markets undergoing energy transition, with important implications for investors, regulators, and climate‐policy design.