Is it attractive to invest in alternative energy? Evidence from a five-factor Fama-French model for regional DJSI and renewable stock indexes

Abstract

PurposeThis study aims to examine the attractiveness of the regional Dow Jones Sustainability Indexes (DJSI) and several renewable energy indexes during December 31, 2010 to December 31, 2019. This study uses a risk-return analysis and a set of explanatory factors. Lastly, this study conducts a comparative analysis of these indexes with conventional indexes.Design/methodology/approachThis study uses data from Eikon, a Thomson Reuters database. To analyze the indexes’ behavior, this study uses the indexes’ annual return as of December 31 for each year. Next, this study estimates the Fama and French’s five-factor model using an ordinary least squares regression for regional DJSI and renewable energy indexes.FindingsThe results show that regional DJSIs delivered returns both above and below conventional indexes. In contrast, renewable energy indexes had high betas and negative returns, making them unattractive to investors.Practical implicationsThe results imply the need for public financing programs that support the transition to a sustainable economy and reduce risk and increase the return on private investment.Social implicationsThis study provides insights for policymakers regarding the importance of sustainability indexes in the transition to a green economy.Originality/valueThis study contributes to the growing literature on Fama and French’s five-factor model of sustainability indexes, especially in the current context characterized by intense green political changes. In particular, this study complements the few studies that have addressed the economic implications of renewable energy indexes in markets.