Does Transition Finance Absorb or Transmit Critical-Material Risk? Green Bonds, Rare-Earth Markets, and Geopolitical Supply Concentration

Critical raw materials such as rare earths are essential, hard to substitute, and supplied under acute geopolitical concentration, making their price risk a first-order concern for financing the energy transition. This paper asks whether green bonds-the principal instrument of transition finance-absorb or transmit this risk, that is, whether they hedge volatility in rare earth element (REE) markets central to the low-carbon transition. Using weekly data for the S&P Green Bond Index and four key REEs over 2018-2025, we apply a multi-method framework combining DCC-GARCH, Markov-switching models, wavelet coherence, and risk-conditioning techniques. Dependence between green bonds and REEs is generally weak and time-varying, supporting diversification benefits. However, the relationship is highly state-dependent: correlations decline and turn negative for several REEs during market stress, indicating conditional hedging and selective safe-haven behaviour. Spillover analysis shows that REE markets are dominant transmitters of shocks, while green bonds remain largely insulated. Amid elevated geopolitical and climate risk, co-movement rises across most elements, weakening hedging effectiveness. The resilience of green bonds is therefore heterogeneous and contingent on both market regimes and material-specific dynamics. Critically, this resilience is source-dependent: the hedging benefit is present under financial-market stress but eroded under supply-side geopolitical risk in strategically concentrated critical-raw-material markets. Green finance thus inherits, rather than diversifies away, critical-material concentration risk precisely when supply disruptions are most acute-a finding with direct implications for critical-raw-material security and the cost of transition capital.