ABSTRACT
This paper examines the potential of clean energy stocks and emission permits to reduce downside risk when combining them in a portfolio with dirty energy assets. We propose a strategy for building portfolios that are well diversified between equity energy and carbon markets that takes into account their dynamic price relationship. The asset allocation proposed is framed in a volatility-timing context, which reacts to changing market conditions, holding different weights at different times. To achieve this objective, we use multivariate GARCH models, specifically the Asymmetric Dynamic Conditional Correlations family, which allow us to obtain good estimations of the conditional covariance matrices of the daily asset returns. To determine the weights of the optimum minimum-risk portfolio, we use a method based on Engle and Colacito (2006) to compare the portfolio volatilities obtained with different models. The analysed period runs from January 19, 2010, to April 4, 2022, which, on the one hand, includes more than twelve years of the EU Emissions Trading System (EU ETS) beyond the Phase I pilot;and, on the other, considers the latest crisis episodes (Sovereign debt crisis, Brexit COVID-19, and the recent Russo–Ukrainian war). Our findings show that investing in clean energy companies is now valuable not only because of its contribution to a sustainable energy transition to renewable sources, but also due to its attractiveness from a financial point of view. This fact provides a ray of hope in terms of the climate emergency and avoiding the current geopolitical conflicts principally caused by certain countries’ energy dependence because their energy mix is still heavily overpowered by fossil fuels. The results of this research should encourage investors to decarbonise their equity portfolios, thus promoting the needed alignment of the financial system with the requirements of the energy transition. © 2022 The Authors
ABSTRACT
This paper analyses whether investing in clean energy significantly worsens the risk level of investors. To that aim, we propose a dynamic strategy to carry out a comparative risk analysis of three minimum-variance portfolios: a portfolio made up exclusively of dirty energies, a portfolio made up only of clean energy assets, and a portfolio combined with the two types of energies. To that aim, we use multivariate GARCH models, concretely Asymmetric Dynamic Conditional Correlations models (ADCC-GARCH) to predict the variance and covariance matrices of the daily asset returns and we compare the portfolio volatilities using the methodology proposed by Engle and Colacito (2006). The analysed period was from January 2010 to September 2021, so that the data include half of phase II, full phase III and the onset of phase IV of the EU ETS, as well as the Brexit and COVID-19 outbreaks in the European context. Our results show that, unlike what happened in other economic crises (subprime, Brexit), from the pandemic crisis, the investment in clean energies is preferable to fossil energies, not only in terms of profitability, as other studies have shown, but also in terms of risk. Therefore, investing in clean energy companies, which are aligned with their role towards socially responsible initiatives, is valuable not only for its contribution to a sustainable energy transition to renewable sources but also for the attractiveness from a financial point of view. © 2022 The Author(s)