Portfolio performance implications of investment in renewable energy equities: Green versus gray

Abstract

AbstractThe Sustainable Development Goals of the United Nation and interest by investors in Environmental, Social and Governance (ESG) investment strategies have caused a rapid shift to the green or renewable energy sector, from traditional or gray (oil, gas, and coal) energy companies. In this study, we examine whether and to what extent, financially speaking, there is a price to pay for investing in renewable energy sector equity. Moreover, we seek to determine whether green investments can be considered a hedge during times of financial stress. We find that alphas from investments in a portfolio of gray (overall energy sector) stocks and versus a portfolio of renewable energy equities during an exogenous, non‐financial shock—the COVID‐19 pandemic—and during non‐crisis periods did not differ statistically. However, the renewable energy index showed higher idiosyncratic volatility than the energy index, as expected. The results are robust to alternative model specifications. From a practical perspective, our results are informative in that they provide insights into the tradeoffs associated with renewable energy investments. In particular, risk‐adjusted returns to a renewable energy portfolio may be affected by greater idiosyncratic risk.