The renewable energy sector has outperformed fossil fuels threefold over the course of the last decade, signalling a broader structural shift as climate change increasingly becomes a core focus of the global agenda, new research has revealed.
Analysis from Imperial College Business School (IMCB) found that renewable energy companies outperformed their fossil fuel counterparts with both higher returns and lower volatility since the start of the last decade.
Yet despite this outperformance, a large disparity remains between government targets and the total investment in renewables, researchers highlighted.
The study, carried out in conjunction with the International Energy Agency, is the second in a series of reports looking at investment in a time of global energy disruption.
It examines the performance of publicly-traded renewable energy and fossil fuel companies in four categories: global markets, advanced economies, emerging markets and developing economies.
Over ten years, the total return for all renewable energy companies in the global markets category reached over 422% compared to 59% for fossil fuels.
Dr Charles Donovan, executive director of the Centre for Climate Finance and Investment at IMCB, 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."
The quantitative analysis calculated measures of risk and financial return for hypothetical investment portfolios based on monthly observations using Bloomberg data.
Researchers divided energy companies into two portfolios: fossil fuels and renewables. The global fossil fuel portfolio consisted of 545 companies, while the renewable energy portfolio had 208.
Tim Gould, head of division for energy supply outlooks and investment, International Energy Agency, said: "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 study also noted that 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.
In the funds industry, the trend towards more sustainable investing has been further galvanised by the Covid-19 pandemic.
In January, the world’s largest asset manager, BlackRock, threatened to dump companies that fail to act on climate change or fail to disclose their climate-risk plans.
UK asset manager M&G is also among a number of firms that have pledged similar actions, saying it intends on ending coal-related investment by 2030.
Meanwhile, Swedish pension fund Första AP-fonden managed to cut its carbon footprint across its equity portfolio by 46% through the course of last year.
IMCB's full report on renewable and fossil fuel energy investment can be found here.
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