Risky finance, riskier climate: when financial instability meets climate risks on the bridge of sustainability uncertainty

This study bridges two critical literatures: climate-related finance theory, which focuses on the destabilizing effects of climate risks on financial markets, and corporate social responsibility (CSR) theory, rooted in the shareholder-stakeholder debate. In doing so, it provides one of the first attempts to explore the systemic interactions between financial instability, sustainability uncertainty, and climate risks. Leveraging the novel U.S. ESG-based Sustainability Uncertainty Index (ESGUI; Ongan et al., 2025) and employing a Time-Varying Parameter Vector Autoregression (TVP-VAR) connectedness framework, we analyze how shocks stemming from financial market stress, ESG investment and policy uncertainty, and climate-related risks propagate and interact across major financial, political, and environmental events in the U.S. economy from 2003 to 2024. The main findings reveal that credit market stress and volatility-driven financial uncertainty act as the major transmitters of instability in the system, with connectedness peaking during 2008–2009 and 2020–2022. However, the transmission of financial instability to climate risks is nonlinear and contingent on sustainability uncertainty. Interestingly, regulatory responses, such as post-Global Financial Crisis reforms and the Paris Agreement, help temporarily mitigate but fail to fully eliminate risk spillovers. These results are robust to the application of the time-varying robust Granger causality test, which serves as an alternative validation approach.