Assessment of Renewable Energy as Investment Opportunity: Risk-Return Impact

Author: Dwina Andini Soerono                                                                                                                        Year: 2018                                                                                                                                            Supervisor: Stefan Wendt

The global aspiration towards a cleaner and more sustainable future has accelerated growth in the renewable energy sector. Nevertheless, the transition from non-renewable or conventional energy sources to renewable or alternative energy sources require substantial capital investment and must be attractive and accessible to future investors. This study evaluates the long-term financial performance of renewable, or alternative energy stocks as an investment opportunity for potential US investors. The conventional energy stocks are used as a comparison to evaluate the alternative energy stock performances within the energy sector. The holding periods that are assessed are 5, 10 and 20 years. The Fama-French Five-Factor Model is used to compute the abnormal returns of these stocks. This model also evaluates the level of sensitivity towards exposure to risks included in the model, namely market, size, value, profitability and investment factors. The results illustrate that both alternative and conventional energy stocks were underperforming through 1997 to 2017 compared to broadly diversified global stocks established in the Fama-French factors. Nonetheless, the alternative energy stocks show better performance than conventional stocks during the 5 and 20-year horizons shown by the statistically significant positive differences in the mean and median values. This is likely to be the result of the Dot-Com bubble in 1998 to 2000, and the increased investment towards the renewable energy sector in 2015. When the results are further broken down into 5-year intervals, alternative energy stocks were underperforming in 2002 to 2012, which could be an indication that the alternative energy stocks were not able to recover as fast as conventional energy stocks after the financial crisis in 2008. Through the variable factors, the results suggest that the alternative energy stocks load more heavily on size and investment factors in comparison to the conventional energy stocks.