In the first EDHEC Climate + Finance special issue of the EDHEC Research Insights supplement to Investment & Pensions Europe, Noël Amenc,  Associate Professor of Finance, EDHEC Business School and Director, Scientific Infra, and Frédéric Blanc-Brude, EDHECinfra Director, contribute an article analysing the outperformance of low-carbon energy infrastructure investments over the past decade.

In recent research, we examined the impact on realised performance of the permanent shift in investor preferences for low carbon energy investments, and how it relates to the expected returns of green power investments.

While green infrastructure has outperformed the ‘core’ infrastructure market over the past decade, this is largely the result of excess demand for such assets that has pushed asset prices up and discount rates down. After controlling for a number of risk factors present in the returns of unlisted infrastructure equity investment, there is no persistent ‘green’ risk factor, but instead a ‘green price premium’ that investors have been willing to pay to increase their holdings of such assets.

We showed the impact of excess demand for green power investments on yield compression by building a measure of the liquidity of the market for green power investment. When too few green infrastructure investments are available in the market, asset prices increase and yields compress. Controlling for this effect, any outperformance of the green power sector over the considered period disappears.

This phenomenon peaked in 2019 and the expected returns of green power investments are now much lower than they used to be. As a result, realised returns should not be used directly as a proxy of the future performance of green power investments.