New research from the Centre for Climate Finance and Investment at Imperial College Business School has found that renewable energy is outperforming fossil fuels in major American and European stock markets, although total investment in clean energy is falling well short of the level needed to put the world on to a sustainable path.
The research, in partnership with the International Energy Agency, is the first in a series of insights led by Imperial examining the financial attractiveness of the renewable power sector. In its report, the performance of listed companies in the US, UK, and Germany & France engaged in fossil fuel supply was analysed versus those active in renewable power over the past 10 years. The results indicate that renewable power shares have offered investors significantly higher total returns relative to fossil fuels. Just as importantly, annualised volatility is also lower across the board.
Furthermore, an analysis of the US portfolio over the period January-April 2020 shows that renewable power companies held up better than fossil fuel companies during the Covid-19 pandemic, which suppressed demand and generated unprecedented losses for the oil industry.
The analysis identified a set of key challenges for investors seeking to increase stock market allocations towards renewables, including:
The renewables listed universe today is small cap/low liquidity. With the regulations facing most asset managers and institutional investors, most renewable energy securities would not be an eligible investment.
There is a lack of depth in the renewables universe in public equity markets. While a larger set of opportunities exist in private equity markets, they are not accessible to individual investors.
“There's momentum gathering behind renewable power, based on its economic advantages” said Dr Charles Donovan, Executive Director of the Centre for Climate Finance and Investment at Imperial College Business School. “Our results show that renewable power is outperforming financially, but has still not attracted sizable support from listed equity investors. The research highlights the challenges facing investors of accessing the growth potential of the renewable power sector via public equity markets. Existing norms in the investment industry will have to change to provide savers and pensioners with better ways to participate in the upsides from a clean energy transition.”