Volatility Connectedness Between Digital Assets and Sustainable Finance

This paper investigates the volatility spillover and connectedness dynamics at the intersection of the rapidly expanding digital asset ecosystem and the sustainable finance sector, motivated by the growing need to manage both financial and environmental regulatory risks. Employing the Diebold-Yilmaz (2012) spillover index framework based on a rolling-window Vector Autoregression (VAR) model, we analyze daily returns of a diverse portfolio of 30 assets from 2020 to 2025. The portfolio includes DeFi tokens (AAVE, Maker), NFTs and utility tokens (WAX, Chiliz), foundational cryptocurrencies, and thematic ETFs focused on clean energy and carbon (ICLN, CRBN). The empirical results reveal a highly interconnected system with a Total Connectedness Index (TCI) of 76.03%. We identify thematic ETFs (KGRN, ICLN) and key infrastructure tokens like Chainlink (NET: 30.35) as the primary net transmitters of volatility. Conversely, cryptocurrencies such as Stacks (NET: − 75.52) and the stablecoin DAI (NET: -34.02) are the largest net receivers of systemic shocks. A pivotal finding is the pronounced sectoral clustering within asset classes, alongside remarkably low cross-sector spillover (below 2%) between the digital asset and ETF groups. This informational boundary suggests significant diversification benefits. The findings provide a quantitative basis for constructing resilient portfolios, highlighting the strategic role of Carbon and Clean Energy ETFs not only for financial diversification but also as a crucial hedge against the inherent carbon-related regulatory risks in the digital asset market.