Clean Energy Investing: Global Comparison of Investment Returns

Clean Energy Investing: Global Comparison of Investment Returns

Executive Summary

This report, a joint effort by the International Energy Agency (IEA) and the Centre for Climate Finance & Investment (CCFI), compares the investment returns and risks of renewable power and fossil fuel portfolios globally and in specific regions over the past decade.

Key Findings

• Renewable Power vs. Fossil Fuels:

  • Global Markets:

    • 10-Year Total Return: Renewable power (422.7%) outperformed fossil fuels (59.0%).
    • 5-Year Total Return: Renewable power (186.6%) again outperformed fossil fuels (185.3%).
    • Volatility: Renewable power had slightly higher volatility (6.2%) compared to fossil fuels (6.3%).
    • Sharpe Ratio: Renewable power had a higher Sharpe ratio (0.86) compared to fossil fuels (0.30).

  • Advanced Economies:

    • 10-Year Total Return: Renewable power (727.0%) outperformed fossil fuels (31.6%).
    • 5-Year Total Return: Renewable power (501.6%) outperformed fossil fuels (52.9%).
    • Volatility: Renewable power had slightly higher volatility (6.3%) compared to fossil fuels (8.0%).

  • Emerging Market and Developing Economies:

    • 10-Year Total Return: Renewable power (136.0%) outperformed fossil fuels (113.8%).
    • 5-Year Total Return: Renewable power (121.2%) outperformed fossil fuels (164.9%).
    • Volatility: Renewable power had slightly higher volatility (6.9%) compared to fossil fuels (5.4%).

  • China:

    • 10-Year Total Return: Renewable power (243.5%) outperformed fossil fuels (41.1%).
    • 5-Year Total Return: Renewable power (29.0%) outperformed fossil fuels (-7.8%).
    • Volatility: Renewable power had slightly higher volatility (8.6%) compared to fossil fuels (6.4%).

• Impact of Economic Conditions and Market Shocks:

  • During the 2020 coronavirus pandemic, renewable power portfolios demonstrated resilience, outperforming fossil fuel companies despite severe market stress.
  • The performance of renewable power portfolios was attributed to both cyclical factors (lower demand and prices for oil) and structural trends towards more sustainable energy systems.

• Investment Strategies and Business Models:

  • Some companies with transition strategies outperformed market benchmarks in recent years.
  • Better standardized and granular data on underlying segments is needed to understand shifts in business models.

• Policy and Economic Implications:

  • The world is still far from achieving a sustainable recovery post-pandemic.
  • The International Energy Agency (IEA) projects that current policies will result in rising CO2 emissions, while its Sustainable Development Scenario (SDS) envisions a path to meeting climate goals.
  • Over the next decade, investment and policy decisions will significantly influence the world's ability to align with the SDS.
  • Renewable power projects require substantial upfront investment, and the cost of capital plays a crucial role in lifecycle costs.

• Data Transparency and Investor Demand:

  • More asset-level data could enhance investor demand for renewables.
  • Reducing information asymmetries could attract a broader range of financial institutions, leading to more favorable financing conditions.

Conclusion

The report highlights the superior risk-adjusted returns of renewable power investments compared to fossil fuels, particularly in emerging markets and developing economies. These findings have significant implications for both investors and policymakers as they navigate the transition to a more sustainable energy system.