Abstract
The rapid growth of electric vehicles, solar roofs, and wind power suggests that the potential growth in green equity investments is an emerging trend. Accordingly, this study measured the predictors of excess equity returns in a portfolio of global green energy producers, from 2010 to 2019. Fixed-effects panel data regressions of daily returns, followed by quantile regressions, were performed. There was some support for the explanation of green equity returns by market returns and market risk (beta), as indicated by the single-factor Capital Asset Pricing Model (CAPM), and the multifactor Fama–French Three-Factor and Fama–French Five-Factor Models. The most significant predictors of green equity returns were Value-at-Risk at a 95% confidence level, and Value-at-Risk at a 99% confidence level. Expected Shortfall was another extreme risk value measure. The importance of extreme value measures suggests the presence of fat-tailed leptokurtic distributions, whereby excess returns were explained by the risk of loss given adverse conditions, primarily at 95% confidence. We conclude that the proliferation of small firms and new entrants in the renewable energy sector has led to the explanation of returns by extreme values of risk.
Highlights
Spurred on by fears of climate change, there has been a surge in fossil fuel substitutes, such as electric vehicles, solar roofs, and the use of wind energy for home energy usage
Conscious investors may wish to capitalize on this growth by purchasing mutual funds or stocks of renewable energy producers
We justify the time period chosen, as data are complete for the 2010–2019 period, and the sample captures the evolution of renewable energy production from being part of a large firm’s production, to small firm production
Summary
Spurred on by fears of climate change, there has been a surge in fossil fuel substitutes, such as electric vehicles, solar roofs, and the use of wind energy for home energy usage. The >$1000 stock price for Tesla in 2021, from low double-digit values in the prior three years, portends the potential for explosive growth in the green energy sector. Rivian Automotive, another electric vehicle producer, has experienced price surges in the pre-IPO period. It follows that investments in green securities may become increasingly attractive as public and private funds flow to producers of fossil fuel substitutes. Conscious investors may wish to capitalize on this growth by purchasing mutual funds or stocks of renewable energy producers.
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