Tracking Growth and Performance in Green Equities - upated

Read this report to better understand the size of the global green economy, how it has performed, what that performance is attributed to, and whether its long-term growth drivers remain intact.

Addressing climate change and environmental issues requires significant investment; estimates suggest that between USD125 to USD 275 trillion is needed to reach net zero greenhouse gas emissions by 2050.1 As governments and investors seek new ways to deploy ever greater capital towards this and other global environmental challenges, there is a need to create a common language on sustainable activities through which to define, measure and invest in the green economy.

One of the main challenges to developing and implementing such a common language is the lack of in-depth data on the green economy and limited corporate reporting on green products and services. Despite the proliferation of green taxonomies globally, improvements in disclosures are likely to be gradual, and measuring the green exposure of large and diverse global investment portfolios will, for the time being, remain challenging for investors.

FTSE Russell's Green Revenues dataset uses disclosed information as the starting point for measuring green revenues for over 16,000 equities, of which c.3,000 are found to have green products and services. In cases where detailed disclosures are lacking, it leverages additional data (such as product volumes) to produce robust, bottom-up estimates of revenues from each green activity for each company. The data captures 133 types of green products and services, in alignment with the EU Taxonomy but also going beyond to cover areas such as waste management and pollution control.

Building on this dataset, this report – our latest annual update on the green economy2 - aims to plug the information deficit created by low levels of disclosure and provide a holistic picture of green trends in the global equity market. As the green economy gathers pace, sustainability-themed investment has become a dominant trend within the financial industry – now too significant for investors to ignore.

The key findings of this report are as follows:

  • The green economy demonstrates a rapidly growing and sizeable investment opportunity (Figure 1). In response to global environmental challenges, including climate change, the green economy recorded a compound annual growth rate of c.14% over the last 12 years. With a market capitalization of over USD7 trillion and a weight of 7.1% of global equity markets, the green economy by itself would be the fifth largest industry, comparable in size to the fossil fuel sector.

Notes: GR-weighted investable market cap. GR2.0 data, including disclosed information and estimates, for 2016 to 2020; Faded 2021 bar represents linear interpolation of 2020 GR data; Data for 2009 to 2015 is extrapolated using disclosed GR percentages and disclosed maximum and minimum ranges. Source: FTSE Russell, May 2022.

  • The green economy is diversified with a growing range of technologies. Some are growing fast – such as energy management and efficiency and transport equipment – while other are growing more modestly, such as renewable energy equipment.
  • Some industries are rapidly greening, with 42% of the Automobiles and Parts sector's market capitalization is focused on lower-carbon solutions, mainly driven by growth in the electric vehicles (EVs) market and Tesla. Utilities is the second greenest sector, with 27% of its market capitalization being focused on low-carbon solutions such as renewable power generation.
  • FTSE Green Revenues data captures green exposure across the whole value chain, in which each link can offer unique investment characteristics. For instance, EVs are not only about auto manufacturers, encompassing activities from lithium mining and charging infrastructure.
  • The green economy is both a developed and emerging markets story. The green economy is globally diverse, albeit with concentration in certain countries such as the United States (54%), followed by China (12%). However, while smaller in total size, Japan and European countries such as France and Germany have a higher exposure to the green economy.
  • The long-term performance of the green economy is strong (Figure 2). The FTSE Environmental Opportunities All Share (EOAS) Index3 outperformed the FTSE Global All Cap by 5.9% over the last five years.4 EOAS is even further ahead next to fossil fuels, where its returns were 19.8% larger than the oil and gas sector over the same period.5

Notes: Index represents Total USD return, based to 31/12/2003, running until 29/04/2022; Companies included in the Environmental Opportunities  All Share Index have at least 20% green revenue. Past performance is not a guarantee of future performance. Source: FTSE Russell, May 2022.

  • So far in 2022 its performance to date has lagged global equity markets. We attribute this to extended valuation premiums and weakness in certain green subsectors, such as renewable energy. However, the long-term drivers remain intact for this fast-developing market, such as an increasing focus on climate finance, investors' growing interest in sustainable investment and green taxonomies coming into force.6 

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1 McKinsey & Company (2022), The net zero transition: what it would cost, what it could bring; Glasgow Financial Alliance for Net Zero (GFANZ) (2021), We need to reach net zero emissions by 2050; GFANZ, launched in April 2021 and co-chaired by Mark Carney and Mike Bloomberg, is a group made up more than 450 banks, insurers and asset managers - including the London Stock Exchange Group - dedicated to helping raise ambitions across the financial system to meet Net Zero by 2050.
2 FTSE Russell (2020), Investing in the green economy – sizing the opportunity
3 Companies must have at least 20% of green revenues derived from environmental products and services to be eligible for the FTSE Environmental Opportunities Index Series
4 Difference between compound annual returns on five-year basis (December 2016 to December 2021). For more details, see FTSE Russell (2022), FTSE Environmental Opportunities Index Series: Factsheet.
5 Difference between compound annual returns on a five-year basis (December 2016 to December 2021); Oil and gas sector represented by the FTSE Global All Cap Index - Oil and Gas
6 FTSE Russell (2021), Global asset owner sustainability survey sheds light on regional differences.

Contact: LSEG Marketing Asia