Effects of climate policy uncertainty on sustainable investment: a dynamic analysis for the U.S

Uncertainties surrounding climate change policies of the United States introduce some degree of risk into sustainable investment decisions in the country. This study is an attempt to provide a new perspective on the nature of this problem. Both the traditional and time-varying nonparametric quantile causality techniques are employed in investigating the effects of climate policy uncertainty on sustainable investment in the United States. Weekly time-series data from October 17, 2010, to August 28, 2022, is used for empirical analysis. Results from the traditional nonparametric quantile causality analysis reveal that climate policy uncertainty has a significant causal effect on both sustainable investment returns and volatility. The results also show that the impact on sustainable investment volatility is greater than the impact on sustainable investment returns. The time-varying nonparametric quantile causality analysis confirms that climate policy uncertainty in the United States affects both the returns and volatility of sustainable investment and that the impact is greater for volatility. It is recommended that governments and policymakers ensure that climate policy objectives are properly defined and adhered to, such that regulatory uncertainty would be limited and private sector participation in sustainable investment would be encouraged. In addition, policies clearly designed to incentivize sustainable investment by integrating risk premiums into expected profits could be employed.