Investments in green energy can help optimize investment portfolios and ‘hedge’ against volatile markets, according to a new study.
Investors try to avoid financial losses by diversifying their portfolios with investments that follow different trends. Clean energy investments tend to be more influenced by government policies and technological advances than factors like overall economic conditions and market vibes that affect traditional stock market investments.
The green energy field has also expanded greatly in recent years and looks set to experience continued growth in the future due to the Paris Agreement and other climate policies. As a result, many people have suggested clean energy investments as a hedging strategy.
But until now, little has been known about the interactions between clean energy investments and traditional stock markets, and past studies have used varying methods and yielded inconsistent results in terms of whether and exactly when clean energy investments represent a safe harbor during market downturns.
In the new study, researchers a statistical method called tail quintile connectedness regression to evaluate 10 years’ worth of daily price data of various stock market indices, including SP500 (US), FTSE100 (UK), Nekkei225 (Japan), CSI300 (China), and STOXX50 (Europe), and the green investment indices Global Clean Energy Index (GCEI), Green Bond Index (GB), and Renewable Energy and Clean Technology Index (RECTI).
The statistical technique enabled the researchers to trace how market shocks propagate from one index to another, showing the connectedness between different markets and the timing, magnitude, and direction of ‘spillovers’ between them.
Clean energy investments can act as buffers providing stability when markets are fluctuating, the researchers report in the journal Energy Economics.
They found that financial shocks often begin in the US, EU, UK stock markets and the RECTI index, then travel to Japanese markets and the GCEI. Most interactions between markets are short-term, but can be longer lasting during market downturns.
Different clean energy indices play different roles in the global financial system: RECTI is active, GCEI receives information passively, and the Green Bond Index is relatively isolated from the rest of the global financial system.
These three indices also reflect different aspects of clean energy development. The GCEI focuses on companies that are specifically involved in the clean energy sector, while RECTI also incorporates a broader suite of clean technology companies. The Green Bond Index spreads risk even more widely across different bond issuers, market sectors, and geographic regions.
Using a so-called multivariant portfolio design approach, clean energy assets emerge as a key strategy for ensuring stable returns, along with the CSI300 index and a type of petroleum known as West Texas Intermediate, or WTI. Looking at pairs of assets, a bivariant analysis suggests the Green Bond Index as an important player. The upshot, say the researchers, is that clean energy assets should be a prominent part of a diversified portfolio to mitigate risk.
Source: Ziadat S.A. et al. “Are clean energy markets hedges for stock markets? A tail quantile connectedness regression.” Energy Economics 2024
Image: ©Anthropocene Magazine
