Green bond vs. Islamic bond: Which one is more environmentally friendly?

This research investigates the dynamic dependence and causality relationship of the S&P Kensho Clean Energy (CE) and Cleantech (CT) indices with two green bond indices, including the S&P Green Bond Index (GB) and Green Bond Select (GBS) indices, and four Islamic bond indices, including A-, AA-, AAA-, and BBB-graded Sukuk Indices. In the long- and medium-term, the dependence of CE and CT on Sukuk and green bond indices strengthens under normal or bearish market conditions based on quantile cross-spectral (coherency). Overall, among all alternative financing instruments, AA- and A-rated Sukuk indices and GBS indices have higher coherency with CE and CT. Furthermore, the direction of causality in the frequency domain is most commonly observed from Sukuk and bond indices to CT and CE. Once again, AA-rated, A-rated, and GBS have more significant causality effects on CT and CE for nearly all frequencies compared to other indices. These results present vital implications for both policymakers who want to advocate the development of environmentally friendly projects and investors who want to invest their capital in green economic activities in terms of diversifying and hedging their investments.