Climate uncertainty fuels financial volatility in AI and tech assets

The accelerating fusion of technology and sustainability is altering global investment dynamics, with climate uncertainty now playing a pivotal role in financial risk distribution across digital innovation sectors. A groundbreaking study, titled “Spillovers Among the Assets of the Fourth Industrial Revolution and the Role of Climate Uncertainty”, published in the Journal of Risk and Financial Management, investigates how climate policy uncertainty influences interconnections among high-tech financial assets.

Researchers Mohammed Alhashim, Nadia Belkhir, and Nader Naifar employ an extended joint connectedness approach to examine volatility spillovers among key sectors of the Fourth Industrial Revolution (4IR): the internet, cybersecurity, artificial intelligence and robotics, fintech, and blockchain.

How interlinked are fourth industrial revolution assets in global financial markets?

Using a time-varying parameter vector autoregressive (TVP-VAR) model, the study finds a high degree of interconnectedness among 4IR assets. Over the 2017–2023 period, the total connectedness index (TCI) averaged 81.34%, indicating intense volatility transmission between these innovation-driven sectors. Fintech emerged as the leading net transmitter of financial shocks, followed closely by internet and AI/robotics sectors. Conversely, blockchain and cybersecurity acted as net receivers, absorbing more shocks than they transmitted.

Volatility spillovers peaked during the onset of the COVID-19 pandemic in 2020, when the TCI reached 95%. This was followed by another surge during the Russian invasion of Ukraine, confirming the crisis-contagion effect that amplifies inter-asset dependencies. These dynamics suggest that in times of global stress, financial markets centered on emerging technologies behave more cohesively, elevating systemic risk but also highlighting coordinated response mechanisms.

The study's dynamic analysis shows the shifting nature of each asset's role. For instance, the internet index functioned as a major shock transmitter during both the early COVID-19 phase and geopolitical upheaval. AI and robotics transitioned from being net receivers before 2020 to becoming transmitters during the pandemic and war periods, underscoring their increased economic centrality.

What role does climate policy uncertainty play in market contagion?

To assess the influence of climate-related policy shifts, the researchers incorporated climate policy uncertainty (CPU) into their quantile regression analysis alongside other global risk factors such as economic policy uncertainty (EPU), geopolitical risk (GPR), oil volatility (OVX), trade policy uncertainty (TPU), and stock market volatility (VIX). The analysis revealed that CPU significantly affects inter-asset spillovers, particularly in low- and medium-volatility regimes.

Specifically, CPU showed a strong positive impact on connectedness at lower quantiles, meaning that during stable periods, rising environmental policy uncertainty leads to tighter linkages among 4IR assets. In contrast, at higher volatility quantiles, the CPU impact diminishes or even reverses, indicating a non-linear effect where climate anxiety contributes to co-movement in calm markets but becomes less predictive during turbulence.

Economic policy uncertainty, meanwhile, exhibited significant positive effects at the highest quantiles, especially during heightened financial stress. This dual-force structure, where CPU dominates under stability and EPU under crisis, highlights the dual-channel through which policy ambiguity influences technological asset behavior.

Interestingly, clean energy strength (measured by the WilderHill Clean Energy Index) correlated with lower 4IR connectedness in low-volatility periods, suggesting that a robust green sector provides diversification benefits and offsets systemic interdependence among digital assets.

What are the strategic implications for investors and policymakers?

The findings offer important implications for investment strategy, risk management, and policy development in the digital era. First, recognizing that fintech, AI, and internet sectors often act as net transmitters of financial contagion, portfolio managers can treat them as early indicators of market shifts. During periods of climate or economic uncertainty, these sectors may function as directional levers in active trading strategies.

Conversely, blockchain and cybersecurity, identified as net receivers, may serve as hedging instruments or stabilization anchors in volatile markets. This insight encourages reallocation during uncertainty spikes to reduce systemic exposure and improve diversification.

Second, the study underscores the growing necessity for climate-informed financial modeling. Investors who overlook the influence of CPU risk misjudging co-movement structures, particularly in tech-heavy portfolios. Integrating environmental policy tracking into asset allocation frameworks could provide an edge in forecasting return dynamics across innovation sectors.

Policymakers also gain from these insights. The results indicate that ambiguous climate policy not only impairs investment confidence but also accelerates risk transmission across high-tech financial networks. More predictable, transparent environmental regulation could reduce unnecessary spillovers, enhancing market stability without dampening innovation.

Furthermore, the research supports dynamic sector rotation strategies. Since the connectedness role of each asset class shifts over time, AI and robotics evolving from reactive to proactive actors, for instance, investors can adapt by moving capital among 4IR sectors based on the prevailing macro-risk landscape.