Focus Markets

22.03.2021

Investing in renewable energies better than fossil fuels

The Centre for Climate Finance & Investment report shows performance of renewables tripled over the past decade
The new report on clean energy investing by the Centre for Climate Finance & Investment at the Imperial College Business School has been published, written with the participation of the IEA (International Energy Agency).

The report examines the financial performance of a global portfolio of fossil fuel and renewable energy companies, looking for trends in the clean energy market and how these are shaping the market’s outlook in the long term.
The companies involved in the study, whose performance was compared in detail, are publicly traded in four categories: Global Markets, Advanced Economies, Emerging Markets & Developing Economies, and China.

According to the report those investing in renewables over the last 10 years tripled their total returns compared to those investing in fossil fuels.
Volatility, in other words, the price variations indicating the investment risk, was lower than fossil fuel in Global and Advanced Economies and higher than fossil fuels in the Emerging Markets & Developing Economies and China.

The results of the analysis show a greater risk/return profile for renewable energy, in both normal conditions and during economic imbalances, which may be an important finding for investors and policy-makers always looking to strike a balance between climate issues, financial stability and economic growth.

Included in the report is a new correlation analysis which, in summary, shows that:

-The global renewable energy portfolio outperformed listed fossil fuel portfolios in every category

-The annualised volatility for renewable energy portfolios was on average lower than fossil fuel portfolios, except in the Emerging Markets & Developing Economies and in the China categories

-The most recent market recession caused by the Coronavirus pandemic showed the sector’s greater resiliency, with renewable portfolios performing better during the crisis

-In normal and volatile market conditions, renewable energy portfolios provide greater diversification benefits thanks to their lower correlation with the broader fossil fuel market

Dr. Charles Donovan, Executive Director of the Centre for Climate Finance & Investment at the Imperial College Business School says that the research “demonstrates that renewables have outperformed fossil fuels all over the world. It's been the same story for more than a decade, yet total investment is still lagging. National regulators, particularly in the United States, must get to work on the reforms needed to level the playing field for clean energy investors".

Renewable energy generated higher total returns than fossil fuels across all the portfolios in an exceptional year during which the unprecedented economic conditions caused by the coronavirus pandemic led to the deterioration of the cornerstones of the energy sector. Renewable energy portfolios proved to be resilient during the pandemic, faring better than fossil fuel companies. This situation also stemmed partly from cyclical factors, such as lower petroleum demand and prices, and partly from the market’s longer-term structural tendencies and the political changes towards more sustainable energy systems.

The document highlights the need for governments, companies and the financial community to define the conditions, develop projects and provide the capital needed to tackle the clean energy investment challenge.

"This report points to clear financial benefits from investing in clean energy transitions, an important step towards mobilising higher levels of investment from the capital markets. But much more still needs to be done to link sources of sustainable finance with the areas of greatest need, especially in emerging markets and developing economies”, said Tim Gould, Head of Division for Energy Supply Outlooks and Investment at the International Energy Agency.

A special report by the IEA, in collaboration with the World Economic Forum and the World Bank is set to come out soon with recommendations for accelerating the financing of the energy transition in emerging markets and developing economies.