Green cryptocurrencies and portfolio diversification in lesser-developed economies

We investigate whether green cryptocurrencies offer diversification benefits to equity investors in lesser-developed economies - markets often characterized by elevated volatility and climate risk. Using daily data from ten such countries, we construct and evaluate over 1400 portfolios under mean-variance, minimum-variance, and downside risk frameworks, including four-moment modified value at risk (VaR) and conditional value at risk (CVaR). We employ the inverse of the ND-GAIN Readiness Index and the ND-GAIN Vulnerability Index as proxies for transition risk and physical risk, respectively, to examine how country-level climate risks feature shape the downside performance of green-tilted cryptocurrency portfolios. Our results reveal that Ripple and Tezos enhance mean-variance efficiency, as evidenced by higher Sharpe ratios, while Stellar, Nano, and Ripple reduce downside risk and expected shortfall for equity portfolios. Cardano, EOS, and MIOTA have only marginal effects on minimizing risk or achieving a higher Sharpe ratio. These benefits are particularly significant in Argentina, Morocco, Pakistan, Chile, and Egypt, although less pronounced in Tunisia and South Africa. We further document that green-crypto holdings provide meaningful downside protection, and their risk-adjusted benefits depend on the prevailing type of climate risk. Overall, this study demonstrates that green cryptocurrencies not only improve the financial performance of investors holding lesser-developed equities but also contribute to climate-aligned investment objectives, offering practical insights for investors and policymakers seeking to achieve the United Nations' Sustainable Development Goals (SDGs) and support climate sustainability through informed investment strategies in the wake of climate risk.