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Going beyond sustainability: The diversification benefits of green energy financial products

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  • Naqvi, Bushra
  • Rizvi, Syed Kumail Abbas
  • Hasnaoui, Amir
  • Shao, Xuefeng

Abstract

After the inclusion of Green energy financing in the list of United Nations Sustainability Goals (SDGs) as SDG 7, the role, importance, and visibility of green financial products; all have escalated enormously. This paper assesses the utility of green exchange-traded funds (ETFs), in the investors' portfolios for their dual potential of sustainability and diversification. ETFs provide a unique opportunity to construct practically investible portfolios and have long been used as conduits to facilitate project financing. In this paper, we use distinct ETFs based on dirty (conventional) and clean (green) energy products and companies, bonds, equity, ex-energy commodity, and real estate markets to examine the diversification benefits of green energy for a US-based investor. We construct efficient frontiers under different asset allocations and diversification strategies using the Markowitz MVO framework. Our results show that green energy ETFs provide significant diversification benefits and move the efficient frontier upward. In contrast, the portfolio performance deteriorates with dirty energy funds under different asset allocation and diversification strategies. Overall, we find that owing to their risk-return profile, green energy ETFs can be a rewarding alternative to dirty energy for investors in the global energy market.

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  • Naqvi, Bushra & Rizvi, Syed Kumail Abbas & Hasnaoui, Amir & Shao, Xuefeng, 2022. "Going beyond sustainability: The diversification benefits of green energy financial products," Energy Economics, Elsevier, vol. 111(C).
    • Handle: RePEc:eee:eneeco:v:111:y:2022:i:c:s0140988322002705
    DOI: 10.1016/j.eneco.2022.106111
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    More about this item

    Keywords

    Markowitz efficient frontiers; Green energy funds; Diversification; Sustainable investment;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

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