Clean energy outperforms dirty power stocks but lacks size

The latest stock market research shows clean energy to be a clear winner both before and during COVID-19, as renewables not only offer investors significantly higher rates of return than fossil fuels, but also do so at lower risk.

Renewable power is outperforming fossil fuels in major American and European stock markets, but total investment in clean energy is still falling well short of the level needed to put the world’s energy system on a sustainable path, according to new research from the Centre for Climate Finance and Investment at Imperial College Business School. 

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 (which provides a measurement of investment risk) 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 — so, with the regulations facing the majority of 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 so, while a larger set of opportunities exist in private equity markets, they are not accessible to individual investors.

Commenting on the latest findings, Dr Charles Donovan, Executive Director of the Centre for Climate Finance and Investment at Imperial College Business School, said:

“There’s momentum gathering behind renewable power, based on its economic advantages.  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.”

The Centre for Climate Finance & Investment at Imperial College Business School undertakes cutting-edge research on how capital markets are responding to climate change. The Centre helps investors and policymakers overcome the lack of clarity about risk and return in clean energy, low-carbon technologies, and green infrastructure. Its mission is to help shape a global energy transformation.

With 16,000 students, 8,000 staff and nine London campuses, Imperial College was originally founded in 1907 and boasts a distinguished roll-call of past achievements, including having pioneered penicillin, holography and fibre optics. Innovating today to shape the future, Imperial also collaborates widely to achieve greater impact. It works with the NHS to improve healthcare in west London, is a leading partner in research and education within the European Union, and is the UK’s number one research collaborator with China.


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