Dynamic connectedness between commodity markets and investor sentiment in “ESG” labeled funds

Abstract

Abstract This study explores the dynamic interactions between price shocks to commodity markets and investor demand, proxied by fund flows, in environmental, social, and governance (ESG)-labeled global equity and bond funds. By focusing on labeled funds, the analysis isolates the sustainability signal that investors observe at the point of allocation. Using a time-varying parameter vector autoregression connectedness framework and controlling for broad equity and bond market conditions, the paper shows that ESG-labeled fund flows are less integrated with the broader system than conventional benchmarks on average, but they display clear asymmetries across commodity classes. Energy commodities are the main commodity transmitters to ESG equity fund flows, whereas industrial metals are the main commodity transmitters to ESG bond fund flows. Dynamic spillovers intensify sharply around the COVID-19 market dislocation and the Russia-Ukraine shock. In the second-stage analysis, stock-market uncertainty dominates in the full sample and pre-crisis period, whereas interest-rate uncertainty dominates during COVID-19 and oil-market uncertainty dominates during the Russia-Ukraine period. These findings show that investor demand for labeled sustainability exposure is state dependent and responds differently to transition-related shocks across equity and bond ESG segments.