Publicly-traded renewable power portfolios outperform fossil fuel portfolios

Renewable power investors continue to outpace fossil fuel investors across the globe, signalling a broader structural trend of decline for fossil fuels, according to new report from the Centre for Climate Finance & Investment at Imperial College Business School (Imperial).  

The analysis, which is the second in a series of reports with the International Energy Agency (IEA), investigates the investment case for clean energy, and examines the performance of publicly-traded renewable energy and fossil fuel companies in four categories: Global Markets, Advanced Economies, Emerging Markets & Developing Economies, and China.  

Across all portfolios, renewable power generated significantly higher total returns over the last ten years.  Annualised volatility was lower than fossil fuel portfolios in the Global and Advanced economies and higher than the fossil fuel portfolios in China and Emerging Markets & Developing Economies.  

The analysis demonstrates a superior risk/return profile for renewable power portfolios in both typical market conditions and during global economic imbalances. Most sustainable investment instruments in the market today do not have the breadth of these constructed portfolios and are unable to accurately reflect renewable energy returns versus fossil fuels over such an extended period. 

The report also includes a new correlation analysis, which observed that:  

• The global renewable portfolio is less correlated to the broader market than the global fossil fuel portfolio 

• Correlation fell during the recent downturn indicating the potential for diversification benefits 

• Unprecedented economic volatility has led to deteriorating fundamentals within the energy sector as renewables portray greater resilience during the pandemic 

Dr Charles Donovan, Executive Director of the Centre for Climate Finance & Investment at Imperial College Business School, says: “Our research demonstrates that all over the world renewable power has outperformed fossil fuels. 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."  

Tim Gould, Head of Division for Energy Supply Outlooks and Investment, International Energy Agency, says: "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 market and developing economies."  

The report concludes that governments, companies and the financial community all have roles to play in setting conditions, developing projects, and providing the capital needed to address the investment challenge in clean energy. In recognition of these opportunities, the International Energy Agency (in collaboration with the World Economic Forum and the World Bank) will produce a special report in the coming months to provide recommendations on accelerating the financing of clean energy transitions in emerging market and developing economies.