According to a new report by the Imperial College Business School and the International Energy Agency (IEA), renewable power investors made three times the gains of fossil fuel investors over the past ten years. There’s been a lot of news about renewables outpacing fossil fuels globally – for example, in the EU, the UK, and the USA. The analysis says the trend is “signaling a broader structural trend of decline for fossil fuels.”
Over the past two years, equity investment funds pitching an environmental, social, or governance (ESG) appealed to 84% of new money from investors. Gabriela Herculano, CEO of the iClima Global Decarbonization Enablers ETF (distributed by HANetf), said that companies with robust social and governance are perceived as those with lower risks.
She said:
We see ESG in terms of risk. We think the ESG space is evolving fast, with investors making the distinction between the companies that are ‘doing less harm,’ companies where decarbonization is a cost, versus the companies that have their revenue in line with the change. Those are the companies (many of those represented in the clean energy exercise that Imperial went through) that are directly in line with solutions. This is the seismic shift we see happening right now, two worlds that are driven by very different forces: a ‘TECHtonic’ movement, as new technologies are emerging to problem solve.
Investors that are in line with the change, the emerging and the relevant solutions, are certain to be the long-term winners compared to any fossil fuel companies. The recent move towards ‘value’ in the energy names in the fossil fuel industry are short-term bets. Lack of inventory in an industry that has received less and less investment will increase commodity prices. Decarbonization is needed to mitigate the many huge risks – geopolitical ones – but it also makes economic sense. Solar and wind are more competitive than oil & gas. EVs will soon be at parity with ICEs as batteries get to the $100 per kWh level. Distributed generation is needed but is also competitive. There is no turning back. The direction of travel is clear; the question is if that will be enough to keep us in the 1.5 degrees [of change in global warming compared to pre-industrial levels].
The publication is the second by Imperial College’s Centre for Climate Finance & Investment in collaboration with the IEA, investigating the investment case for clean energy. The research found that publicly-traded renewable power portfolios outperformed fossil fuel portfolios regarding higher returns and lower volatility over the last decade.
It examined companies’ performance in both sectors under four categories (emerging markets and developing economies, advanced economies, global markets, and China). It found that renewables outperformed in every category, generating significantly higher (367%) total returns. In the advanced market category, renewables’ return outweighed fossil fuels by 2300%!
Herculano said the Imperial research comparing the investment returns of clean energy versus fossil fuels only tells part of the decarbonization story. She pointed out:
Equally impressive returns are those of the EV makers, and also across the lithium-ion battery storage supply chain, the network of charging stations, and the suppliers of those. Equally impressive and exciting is to see some powerful performance across the fuel cell and electrolyzer names, a proxy for the boom in green hydrogen that is emerging. Decarbonization is not just about solar and wind. Heat pumps, measurement instruments for energy efficiency are very relevant too.
The new report also shows correlations between renewables and the broader market is a lot lower than for fossil fuels. Meaning there’s potential for diversification benefit. It also indicates clean energy possessed greater resilience during the pandemic.
Dr. Charles Donovan, the Imperial College Business School’s executive director, said:
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.
On top of greater returns for investors, the price for renewable power is dropping fast. Solar is the cheapest electricity in history now. Solar installations are even improving people’s lives on the local level. They’re helping to reduce air pollution, which saves lives and putting money in peoples’ pockets. A school district in Arkansas saved so much money by transitioning to solar power that it was able to give every teacher a $15,000 raise!
