Sustainable Energy Marketplace and Societal Readiness

This paper develops a comprehensive green energy investment model that examines the intricate relationship between societal acceptance, financial returns, and investment decisions in the context of green energy projects. The model is specifically applied to the aftermath of the Fukushima nuclear disaster, a pivotal event that reshaped public perceptions and policy directions regarding energy sources. By integrating societal acceptance as a key variable, the model accounts for the influence of public opinion on investment flows and expected returns in the green energy sector. The study utilizes empirical data to validate the model, demonstrating how societal acceptance significantly impacts both the risk and profitability of green energy investments. It also highlights a connection between societal acceptance of nuclear energy and job creation in the energy sector. The findings underscore the importance of aligning investment strategies with societal values, particularly in the wake of events that shift public attitudes towards energy sources. This research contributes to the broader understanding of sustainable energy investments, offering insights for policymakers and investors on how to navigate the complexities of public sentiment in the transition to green energy.

Introduction

The transition towards sustainable energy sources is a critical global objective, driven by the need to mitigate climate change and reduce dependency on fossil fuels. Within this context, investment in green energy—encompassing renewable energy technologies like wind, solar, and hydroelectric power—has gained significant attention from policymakers, investors, and consumers alike. The financial viability of green energy projects, however, hinges not only on traditional market factors such as costs and returns but also on the evolving attitudes of investors and consumers towards 2 these technologies. This paper seeks to explore the intricate relationships between societal acceptance, investor behavior, and investment in green energy, using a theoretical model that is empirically tested through a reduced-form approach.

Green energy is often perceived as being synonymous with renewable sources like solar and wind, which are praised for their sustainability and minimal environmental impact. However, nuclear energy, despite being a carbon-free and highly reliable power source, is frequently excluded from the green energy narrative. This exclusion stems from concerns about radioactive waste, potential accidents, and public fear, despite its capacity to produce large amounts of energy with a small environmental footprint. Ironically, nuclear energy is arguably one of the most viable solutions for meeting large-scale energy demands without contributing to greenhouse gas emissions, making its exclusion from the green energy conversation both a missed opportunity and a point of contention. In this paper, we focus on nuclear energy to test our propositions regarding sustainable energy investments and thus societal readiness becomes a cornerstone of the investors’ decisions.

Traditional asset pricing models, such as the Capital Asset Pricing Model (CAPM) developed by Sharpe (1964) and the Intertemporal Capital Asset Pricing Model (ICAPM) proposed by Merton (1973), primarily focus on pecuniary returns and abstract from the nonpecuniary utility that investors may derive from holding certain assets. These models assume homogeneity in investor preferences and ignore the potential influence of non-financial factors, such as environmental, social, and governance (ESG) concerns, on investment decisions. However, a growing body of research has begun to challenge these assumptions, incorporating factors such as disagreement over payoffs and investor tastes for certain types of assets, particularly those aligned with ESG criteria.

One of the most notable contributions to this field is the work by Pastor, Stambaugh, and Taylor (2021), who developed a model that integrates ESG concerns into investment decisions. In their model, investors derive nonpecuniary utility from holding shares in green firms, leading to the formation of an “ESG factor” that influences the returns on green energy investments. Their findings suggest a direct relationship between investor attitudes towards clean energy and the financial performance of green assets. While their model provides valuable insights, it primarily focuses on the investor side of the equation, assuming that investors are heterogeneous in their preferences and derive utility from holding green assets.

This paper deviates from the model proposed by Pastor, Stambaugh, and Taylor (2021) in two significant ways. First, our theoretical model posits that investors do not derive direct utility from holding green assets. Instead, we focus on investors’ risk perception, particularly their sensitivity to the risks associated with green energy investments. This approach aligns more closely with the work of Fama and French (2007), who argue that risk sensitivity can be a critical determinant of investment behavior. In our model, investor behavior is influenced by their perception of the risks associated with green energy, rather than by any intrinsic satisfaction from holding such assets.

Second, and perhaps more importantly, our model incorporates consumer taste for green energy, recognizing that consumer demand plays a crucial role in shaping the financial landscape of green energy investments. Unlike existing models that treat investor and consumer behavior in isolation, our approach integrates both perspectives, allowing us to capture the general equilibrium effects of investor, consumer, and producer behavior on green energy investment. This integrated approach not only fills a gap in the existing literature but also provides a more comprehensive framework for 4 understanding the dynamics of green energy markets.

The theoretical foundation for this paper draws on the work of Fama and French (2007), who explored the implications of disagreement over payoffs and heterogeneity in investor tastes. Their empirical findings, as tested by Ng and Zheng (2018), support the notion that investor preferences play a significant role in the pricing of green assets. Building on these insights, our model aims to provide a nuanced understanding of how both investor risk perception and consumer preferences jointly influence investment decisions in the green energy sector.

In developing our model, we also consider the broader socio-economic context, particularly the impact of significant events on public perception and investment behavior. The Fukushima nuclear disaster serves as a pivotal case study in this regard, offering a unique opportunity to examine how societal shocks can alter the trajectory of energy investments. The Fukushima event not only shifted public attitudes towards nuclear energy but also had broader implications for investment in alternative energy sources, including green energy. By incorporating this event into our empirical analysis, we aim to illustrate the practical applicability of our model in real-world scenarios.

Finally, we explore impact of societal attitude toward sustainable energy on employment opportunities and find that growth in societal readiness is indeed associated with greater number of employees in both nuclear and brown firms.

In summary, this paper contributes to the growing literature on green energy investment by developing a theoretical model that integrates both investor risk perception and consumer preferences. Through empirical testing, we aim to validate the model’s predictions and provide insights into the factors that drive investment in sustainable energy technologies. The findings of this research have important 5 implications for policymakers, investors, and businesses seeking to navigate the complexities of the green energy market in the face of evolving societal attitudes and environmental challenges.

The paper further proceeds with the literature review, builds theoretical model of sustainable [green] energy marketplace, translates developed theory into empirical application highlighting relationship between metrics related to equity trading and performance in the energy stocks and societal readiness for generally green and specifically nuclear energy. We also run event study of the Fukushima Nuclear Plant accident and provide discussion of the job market implications and conclusions in the last two sections of the paper.