ESG investments: Is it all about the money? A closer look at climate risks

Existing literature on the Environmental, Social, and Governance (ESG)-climate risk nexus mostly relies on static analysis, neglecting the time-frequency heterogeneity and cross-market disparities in their dynamic interdependencies. This study fills this gap by investigating the multiscale dynamic relationship between ESG investments and climate risks using daily data from March 31, 2016 to June 30, 2025, covering global, developed, and emerging market ESG indices, as well as climate physical and transition risk indices. We employ the rolling-window wavelet correlation approach to identify time-dependent and scale-dependent effects. The empirical results show that, first, physical risk is characterized by short-term negative shocks driven by sentiment and a long-term increase in risk aversion. Second, transition risk exhibits significant time-scale differences, with a stronger positive effect in the long run than in the short run, making it more suitable for long-term considerations. Third, developed economies are more capable of hedging short-term physical risks, and also maintain hedging ability over the long term, but their ability to hedge transition risks is relatively weak. In emerging markets, the ability to hedge short-term climate risks is weak, but their long-term hedging capacity is relatively strong. Against the backdrop of worsening climate crises, this paper proposes policy recommendations to stabilize ESG markets.