Renewable-energy shares have significantly outperformed fossil fuels in major American and European stock markets over the past ten years, with considerably lower volatility, according to a study by the International Energy Agency and Imperial College London.

Their report, Energy Investing: Exploring Risk and Return in the Capital Markets, analysed the market performance of listed fossil-fuel companies and “those active in renewable power” in the US, UK, Germany and France, and found that “renewable power shares have offered investors significantly higher total returns relative to fossil fuels”.

But the report also points out that capital allocation to renewables via stock markets “is falling far short of government [energy transition] goals due to obstacles facing investors”.

While the recent oil price crash due to the coronavirus pandemic and Saudi-Russia spat has clearly driven down the stock market performance of fossil-fuel companies since January — the report does take into account share prices up to 28 May — renewables shares were already outperforming hydrocarbons before the start of this year.

The report shows that the "total return" from fossil-fuel-based portfolios versus renewables over five- and ten-year periods were as follows: (note: there was a lack of listed renewables companies in the UK in 2010-15 for an accurate comparison):

10 years total return	Fossil fuel	Renewable power
US	97.2%	200.3%
UK	7.1%	N/A
Fra & Ger	-25.1%	171.1%

5 years total return	Fossil fuel	Renewable power
US	-9.6%	66.7%
UK	8.8%	75.4%
Fra & Ger	-20.7%	178.2%

Total return is defined as "the total percentage change in the financial value of a portfolio over a given period. It includes changes in underlying securities prices, as well as income from distributions and dividends. Total return assumes constant reinvestment of income".

“There's momentum gathering behind renewable power, based on its economic advantages,” said Charles Donovan, executive director of the Centre for Climate Finance and Investment at Imperial College Business School. “Our results show that renewable power is outperforming financially, but has still not attracted sizable support from listed equity investors.

“The research highlights the challenges facing investors of accessing the growth potential of the renewable power sector via public equity markets. Existing norms in the investment industry will have to change to provide savers and pensioners with better ways to participate in the upsides from a clean energy transition.”

While the recent oil price crash due to the coronavirus pandemic and Saudi-Russia spat has clearly driven down the stock market performance of fossil-fuel companies since January — the report takes into account share prices up to 28 May — renewables shares were already outperforming hydrocarbons before the start of this year.

The study also expains that a lack of liquidity and depth in the renewables sector may be holding back investment.

“Large asset managers, asset owners, and other institutional investors, such as pension funds need ample liquidity to enter a position,” says the report. "It is easier to allocate a meaningful percentage of their assets under management (AUM) to renewables if the market is deep and liquid. Currently, that is not the case. Most asset managers and institutional investors face certain requirements concerning the liquidity of their stock holdings. The vast majority of renewable energy securities in the market today would not be deemed eligible investments due to their size and daily traded volume.

"Many investors treat renewables as a developing thematic area. As of today, their choices within that theme in listed equity markets are highly limited... the listed universe only accounts for a small fraction of all investment possibilities in renewable energy."

For the purposes of this report, renewables companies were defined as equipment manufacturers, project developers, green uitilities (which derive more than 50% of revenue from renewable power activities, and yieldcos (holding companies for operational renewables projects). Fossil-fuel companies were defined as those involved in coal operations, oil & gas exploration and production, integrated oils, midstream oil & gas, oil & gas services and equipment, and refining and marketing.

Transition

Renewables shares have 'significantly outperformed fossil fuels over past 10 years': IEA