Renewable energies in Europe

A priori beliefs and institutional pressure hinder investments

Andrea Masini, Professor of Operations Management and Information Technology - September 15th, 2013
Renewable energy sources - Solar panels

Even though renewable energies are increasingly considered the energy sources of the future and continue to receive significant public support, their share in investment portfolios remains small. Andrea Masini and Emanuela Menichetti investigate the nonfinancial factors that hold private investors back.

Andrea Masini ©HEC Paris

Andrea Masini holds a PhD in Management from INSEAD but he first studied mechanical engineering at La Sapienza University (Rome). He teaches Operations Management and Information (...)

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In 2008, the International Energy Agency (IEA) called for an “energy technology revolution” in order to cut energy-related carbon dioxide emissions in half by 2050. But for this objective to be achieved, the IEA estimates that the contribution of renewable energies to primary energy supply must exceed 50%. Renewable energy technologies continue to account for only a small fraction of the world’s supply, in spite of their many environmental, economic, and social advantages, as well as the support they receive from various governments. One possible cause for this limited diffusion is that, while the transition towards a low-carbon economy requires important, potentially appealing investments, private finance has so far played a relatively marginal role in this industry. “I started working on renewable energies more than 15 years ago,” says Andrea Masini. “I chose to study investments in renewables because I realized over time that the lack of appropriate financing is one of the reasons why these technologies do not diffuse to the extent we expect and need them to.”


Securing the huge additional investments needed to achieve the proposed reduction targets is particularly challenging in a context of global economic uncertainty. Still, dedicated policies have been implemented to stimulate investors, who can play a key role in mobilizing capital to support renewable energy technologies. “Many of the efforts conducted so far have been only moderately effective because, by failing to understand the behavioral context in which investors make decisions, they have been unable to leverage some key drivers of the investment process,” explains Masini. That is why in addition to a rational evaluation of the investment opportunities, Masini and Menichetti drew upon studies in behavioral finance and institutional theory to examine how a number of non-financial factors affect investor decisions.


Their results shed new light on the role of nonfinancial factors in determining the share of renewable energy technologies in energy portfolios, with important implications for both investors and policy-makers. They suggest these technologies still suffer from a series of biased perceptions and preconceptions that favor status quo energy production models over innovative alternatives. “Our analysis has revealed that a priori beliefs on the technical adequacy of the investment opportunities play a much more important role in driving investments than the perceived effectiveness of existing policies. A technology’s perceived maturity is the most important factor, it is even more important than incentives that may be allocated by governments,” says Masini. Investors seem to have very little faith in dedicated policy measures that directly support renewable energy technologies, for instance through short-lived subsidies. “Investors think that dedicated policies to support renewables are virtually ineffective or that they will change soon, so they don’t count on them too much and prefer to invest in technologies that have already proven their reliability.” This leads Andrea Masini to advise policy-makers to focus on the long-term stability of policies.

Non-financial factors determine the share of renewable energy technologies in energy portfolios.


Investors are sensitive to the technical feasibility or the proven performance record of a technology, as well as to institutional pressures. Masini and Menichetti’s findings also reveal short investment horizons and extreme sensitivity to the pressure exerted by peers and external consultants in investor decisions. “This pressure tends to have a negative influence, since the industry as a whole is skeptical about the reliability of these technologies,” says Masini. “However, investors who have a higher level of experience seem to be able to resist that pressure: they are more likely to increase the share of renewables in their portfolio.”

The study also shows that, contrary to popular belief, investors who have historically bigger appetites for financially and technologically risky technologies do not always have higher percentages of renewable energy investments in their portfolios. “When someone decides to include even a low percentage of renewable energy investments in their portfolio, he or she must compensate for the risk by including a higher percentage of traditional investments or mature renewables such as offshore wind. But, on the other hand, focusing on a few technologies that are fully proven reduces valuable opportunities for diversifying energy portfolios and hedging against price fluctuations, as well as running a higher risk of missing out on opportunities that are more uncertain and costly but have tremendous potential.”

Based on an interview with Andrea Masini and the article “Investment Decisions in the Renewable Energy Sector: an Analysis of Non-Financial Drivers” co-authored with Emanuela Menichetti (Technological Forecasting and Social Change , vol. 80 no. 3, mars 2013).


By incorporating cognitive and behavioral elements, Andrea Masini and Emanuela Menichetti’s research provides a better understanding of the investors’ decision-making process and thus has some implications for:

• Policy-makers, who could design more effective policy instruments to support renewable energy technologies. This research suggests that policy makers can redirect budgets to better leverage investor biases and their impact on investment decisions; for instance, by supporting R&D programs in the public and private sectors, by promoting demonstration projects, and by further disseminating information on renewable energy systems within the relevant business circles and among key stakeholders.

• Managers of innovative renewable energy projects, who need to attract investors. This research suggests that managers can draw on study findings to better communicate to investors about the acceptable degrees of technological risk associated with renewable energy technologies.


Andrea Masini and Emanuela Menichetti developed a conceptual model that examines the impact of non-financial factors on renewable energy investments. The model was empirically tested using primary data collected in 2009 through about 100 questionnaires filled out by several groups of European investors, including hedge funds, banks, private equity firms, and insurance companies. Andrea Masini points out that the results may be difficult to generalize because the study was restricted to a specific empirical and geographical context (Europe).