Shares in listed renewables firms are outperforming their fossil fuel equivalents, both in terms of returns and volatility. But although investment is rising, they’re still not getting enough to meet our 2050 targets, says the IEA. Why? In this article summarising the first of a series of reports they look at the 5 and 10 year record of the two verticals. In all the three territories analysed – the U.S., the U.K., and Germany/France – renewables outperformed fossils. That has been true even during the 2020 pandemic crisis. Future reports, in collaboration with the Centre for Climate Finance & Investment, promise to provide more advanced analysis. But for now, the report argues that strong performance simply may not be sufficient to attract the large volumes of investment required to meet targets. Additional policy measures are going to be needed to reach “take off”.
Going into the COVID-19 crisis, the trend towards renewable power was accelerating. Renewables accounted for nearly two-thirds of additions to the power sector last year and renewable power capacity had been increasing at over 8% annually over the past 10 years.
Yet, despite enormous advances in the cost-competitiveness of renewables over the past decade, investments in clean energy are still falling short of the level needed to put the world’s energy system on a sustainable path.
5 and 10 year historical return, volatility
Capital allocation decisions in the private sector hinge upon expectations. Given the inherent challenges of seeing into the future, investors often rely on history as a guide. Has investing in clean energy made financial sense over time? Was the recent crash in fossil fuel commodity prices positive or negative for renewables?
To shed light on this debate, we investigate the historical risk and return proposition to investors in the energy sector. Our study examines the financial performance of listed companies engaged in fossil fuel supply as compared to those active in renewable power over the past 5 and 10 years. Our twofold aim is to document the characteristics of this evolving investment universe and set the stage for a more advanced analysis of investment attractiveness in future reports.
We constructed hypothetical investment portfolios in three countries/regions: 1) the United States, 2) the United Kingdom, and 3) Germany & France. We calculated the total return and annualised volatility of these portfolios over 5 and 10-year periods.
Figure 1 shows the 5-year results, which is more complete in terms of data. The numbers for the 10-year view are broadly similar, and can be found in the Results section [of the report].
Our results indicate that renewable power shares offered investors higher total returns relative to fossil fuels. Just as importantly, annualised volatility (a measure of investment risk) for the renewable power portfolio was lower across the board.
2020 pandemic lockdown
The complexion of financial markets changed dramatically this year. Unprecedented economic conditions have led to deteriorating fundamentals in the energy sector. An updated look at the US portfolios over the first 4 months of 2020 shows that the renewable power companies have held up better than fossil fuel companies during this period of severe stress and volatility.
Our analysis demonstrates a superior risk/return profile for renewable power in both ordinary market conditions and a recent tail risk event.
Strong share performance isn’t going to be enough
Given the apparent financial attractiveness of renewable power, why hasn’t financing via public markets taken off? As we explore in this report, risk and return are the cornerstones of investment beliefs. However, to mobilise listed equity investors toward the objective of decarbonisation, strong performance may not be sufficient. Additional measures will be required to prepare the industry for full-fledged support from global capital markets.