Investors in renewables tripled fossil fuel performance over the past decade, while equity investment funds offering an environmental, social or governance (ESG) focus attracted 84% of new money from investors over the past two years, according to two new research reports this week.

Research from Imperial College Business School and the International Energy Agency (IEA) found that publicly-traded renewable power portfolios outperformed fossil fuel portfolios in terms of higher returns and lower volatility over last 10 years.

Correlations between renewables and the broader market is much lower than for fossil fuels, which the report said highlighted “potential diversification benefit” of renewable energy, with the disruption from the COVID-19 pandemic also highlighting greater resilience of the greener subsector of the energy market.

The IEA report, carried out by Imperial, examined the performance of publicly-traded renewable energy and fossil fuel companies in four categories – global markets, advanced economies, emerging markets & developing economies, and China – and found renewable power across all four 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 & developing section.

“Our research demonstrates that all over the world renewable power has outperformed fossil fuels,” said Dr Charles Donovan of the Imperial College Business School.

“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.”

Earlier in the week, Calastone’s global investor report showed net sales of ESG funds rose sevenfold over the past two years to reach $15.1bn (£10.9bn) out of a total of $18.1bn, with the final four months of 2020 seeing larger ESG inflows than the first eight month and greater than the whole of 2019.

The Imperial research comparing the investment returns of fossil fuel versus clean energy is telling only part of the decarbonisation story, said Gabriela Herculano, CEO of the iClima Global Decarbonisation Enablers ETF, which is distributed by HANetf.

“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 incredibly strong performance across the fuel cell and electrolyser names, a proxy for the boom in green hydrogen that is emerging.

“Decarbonisation is not just about solar and wind. Heat pumps, measurement instruments for energy efficiency are very relevant too,” she said.

The iClima ETF focuses on all decarbonisation solutions and on the enablers of those products and service.

Herculano said the ESG inflow data from Calastone showed that companies with robust social and governance are being perceived as those with lower risks.

“We see ESG in terms of risk. We think the ESG space is evolving fast, with investors clearly making the distinction between the companies that are ‘doing less harm’, companies where decarbonisation is a cost, versus the companies that have their revenue in line with 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, Herculano suggested.

“The recent move towards ‘value’ in the energy names in the fossil fuel industry are short term bets,” she said.

“Lack of inventory in an industry that has received less and less investment will create some increase in commodity prices.

“Decarbonisation is needed as a way to mitigate the many huge risks – geopolitical ones – but it also makes economic sense. Solar and wind are more competitive than oil & gas. EVs are soon going to 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].”

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