Chasing the 'green bandwagon' in times of uncertainty

Highlights: • Current hype in green investing can affect pricing dynamics in U.S. energy equities. • To characterise changes in investors' behaviour, we derive a dynamic herding metric. • Herding is seen as a temporary failure to allocate attention to relevant information. • Policy uncertainty shocks affect green allocations, but not crude oil allocations. • Higher transparency and less policy uncertainty is needed from regulatory authorities. The transition to a low-carbon economy poses significant challenges for investors in energy markets, entailing higher uncertainty and not just higher risks. On the back of the ongoing greening in investment preferences, we focus on investors' group behaviour with respect to U.S. energy equities, which lie at the crossroads in this energy transition phase from an old technology that relies heavily on oil, to a new, greener one. Based on a dynamic herding metric, we find that changes in investors' behaviour with respect to green asset allocations require a better information set than in the case of crude oil allocations, for which only information on returns is a relevant driver of behaviour. We argue that policy uncertainty is better than financial risk proxies in reflecting the multidimensional nature of uncertainty and the various risks associated with investing in green energy today. Our findings suggest the need to reduce uncertainty stemming from the policy realm, given its raising impact on investors' portfolios on the back of higher allocations towards greener assets.