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Renewable Power Portfolios Outperforming Fossil Fuel

According to a recent report completed by Imperial College Business School in partnership with the International Energy Agency, publicly traded renewable energy portfolios have consistently shown higher returns for investors and lower volatility than fossil fuels over the past decade. Research shows that renewable energy has increased power capacity by 8% annually over the past 10 years, and in 2019, two-thirds of additions to the power sector were renewables.

Despite clean energy shares outperforming fossil fuels, investments through public markets have yet to take off. Why is this?

The answer is rooted in a key element of investment trends; capital allocation decisions are based on history. Investors formulate their expectations of risk and return based on how well portfolios have done in the past.

To meet the financial world's reliance on expectations with up-to-date information, Imperial College Business School analyzed the total returns and annualized volatility of companies engaging in fossil fuel supply versus those active in renewable power over the past 5-10 years.

Their research has three main findings:

  • Renewable Power portfolios offered higher total returns than Fossil Fuel portfolios

  • Fossil Fuels experienced larger drawdowns than Renewable Power portfolios in times of high market and oil price volatility

  • Renewable Power portfolios had an annualized volatility that was similar, or lower than Fossil Fuel portfolios

While the sample size for the renewable power portfolios does not sufficiently meet rigorous academic research standards, Imperial College Business School hopes the research they’ve completed will promote the financial benefits of allocating assets to renewables. Now that this quantitative data analysis is available, the goal is to make it accessible and visible to investor and policymakers to advance asset allocation to renewables in US and European markets.

In order meet the growing need for clean energy to mitigate the effects of climate change, the renewable energy sector will need to see greater investment activity. For this to happen, the investment industry may need to adapt to make it easier for renewable power companies ingest large volumes of capital from public markets.

The good news is research is continuing to take place on this topic, and the recent events of COVID-19 only bolster the case for renewable energy investment.

To read more about this research you can find the original report here:

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