Are Renewable Energy Stocks an Attractive Investment?

Abstract

This study investigates the attractiveness of renewable energy stocks as an investment from 2018 to 2022 in the United States, amidst the growing interest in renewable energy driven by policymakers and socially responsible investors. Utilising a long-short portfolio construction, going long on renewable energy stocks and short on non-renewable energy ,we isolate renewability and assess its relationship with stock returns. Employing Fama and French regression through the asset pricing models; CAPM model, the Fama and French Three-Factor model (1992), and the Fama and French Five-Factor model (2015) we aim to provide comprehensive insights into the adjusted renewability-return relationship. Our findings illustrate positive abnormal returns across the three asset pricing models for the long-short portfolio, indicating compensation exceeding the risk undertaken by investors within renewable energy stocks. Moreover, portfolios with higher renewability exhibited higher and more significant abnormal returns, suggesting a positive relationship between renewability and stock returns. These findings are relevant for investors, corporations, governments and other policymaking entities when constructing investing strategies and especially when governments construct policies and subsidies that affect the energy industries.