Risk-return relationship of the renewable energy industry

Abstract

This paper examines the risk-return relationship of the renewable energy industry by estimating the systematic risk and its determining factors. Using a variable beta model, we find that the systematic risk has decreased compared to previous research. However, an estimated beta of approximately 1.5 is still high given the low stock returns realized over the past decade. The empirical results of our restricted model show that return on assets increases the systematic risk, while growth opportunities have the opposite impact. Furthermore, we use our findings to address the overall question of whether the recent development of renewable investments is driven by profitability or sustainable investments. Although the industry is becoming more cost-competitive, it seems that sustainable investments and climate change policies also play an important role.