Renewable investment funds in the UK are outperforming their peers on the London Stock Exchange, a new study from Imperial College London has concluded.
The analysis of historical data shows, when adjusting for risk, the funds have generated greater returns on investment than both oil and gas and utilities shares, as well as the wider stock market.
The study examined the performance of so-called “yieldcos” – companies created to deliver stable long-term returns for shareholders by buying and holding operational renewable energy assets.
Previous research has found, although renewable energy projects may appear to be an attractive proposition for institutional investors such as pension funds, direct investments can be “prohibitively expensive” and difficult to assess for outsiders to the sector.
“While many institutional investors have successfully implemented strategies to invest directly in unlisted infrastructure projects, others have hesitated due to concerns regarding liquidity, diversification, and the skills or knowledge required”, the report states. Yieldcos offer a way in for these investors.
The study found between March 2013 and December 2017, UK yieldcos produced an annualised total return of 8.13 per cent, doing far better than utilities (1.46 per cent) and only slightly underperforming against oil and gas stocks (8.34 per cent) and the FTSE All-Share Index (8.24 per cent).
However, yieldcos were also shown to be less risky, with more stable earnings, and therefore a better overall bet for investors.
The Sharpe ratio – a risk-adjusted measure of financial performance – was around 1.42 for yieldcos, compared to 0.41 for oil and gas shares, 0.08 for utilities stocks and 0.81 for the FTSE All-Share Index.
“On a risk-adjusted basis, UK yieldcos performance was superior to all domestic equity index benchmarks,” the study concluded.
The research also examined yieldcos in the US and Canada, which were found to have more volatile returns than those in the UK. In the case of the US yieldcos, this was partly the result of greater levels of debt.
Canadian yieldcos compensated for this additional volatility somewhat with higher earnings. Nevertheless, only UK yieldcos were able to deliver high risk-adjusted returns.
Charles Donovan, director of the Centre for Climate Finance and Investment at Imperial College Business School, said: “The findings have displayed a robust evidence about the risk-return profile of clean energy investing, with yieldcos in the UK performing better than conventional energy.
“It is important to make the financial industry aware of the potential for sustainable energy infrastructure to be characterised as a unique asset class whose risk/return characteristics cannot be replicated from within a diversified investment portfolio.”
He continued: “I find the disparity between the US and UK fascinating. Both markets embarked down this green infrastructure path at the exact same time with the exact same idea.
“But here’s the rub; the US blew it. There has just been too aggressive an approach to structuring in the US and performance has suffered as a result.”