Clean energy investing in public capital markets: Portfolio benefits of yieldcos

Deployment of clean energy technologies in order to mitigate climate change requires large-scale mobilization of capital markets. Investors’ perceptions that renewable energy investments do not deliver attractive returns compared with conventional alternatives can impede the flow of sufficient capital to finance these requirements. This paper examines whether publicly-traded financial products offer investors competitive risk-adjusted returns, or whether renewable energy investors face a penalty for choosing sustainable assets. We use a traditional portfolio approach to test whether adding renewable energy exchange-traded funds (ETFs) to a standard portfolio provides diversification benefits over a period of study of two, six, and nine years. We also examine the benefits of investing in yieldcos, which hold operational renewable energy assets. We find that the renewable energy ETFs provide only minimal diversification benefits, and that a yieldco index fund provides none. However, given the superior performance demonstrated by yieldcos based outside the US, we repeat the optimization using a constructed index featuring non-US yieldcos, and find that it improves Sharpe ratio. The analysis suggests that public investment in renewable energy can be profitable, but existing vehicles may not be managed properly to deliver their true benefit. In particular, the non-US yieldco model demonstrates better performance and offers portfolio benefits that are not matched by US yieldcos.