Investing in the green economy - sizing the opportunity

As an increasingly important component of efforts to address environmental objectives, the green economy – and its associated data – has become a key part of an investor’s sustainable investment tool kit.

Indeed, the role of investors in mobilising climate finance is critical, with clients and regulators alike increasingly looking to financial institutions to deploy investment in the green economy.

Given the size of budgets allocated to green investments – such as the EU Green Deal – the green economy is also an important segment for investors looking for growth. For example, the investment opportunity in the green economy is already equivalent to 5% of the world’s total listed equity market; it has grown faster than the overall equity market since 2009 and is estimated to have overtaken the size of the oil & gas sector. Calls for a green-focused recovery and the acceleration of industries in transition further define its importance.

With the development of new green taxonomies within multiple jurisdictions at the national level, broad, granular datasets are going to be important as part of the implementation process. In line with this, what constitutes a green product or service is under increasing scrutiny.

To date, the EU’s green taxonomy is the most advanced, but the UK, China, Japan and Malaysia are also involved in developing their own taxonomies. While the focus of each country differs to some degree, they share the fundamental driver of mobilising climate finance.

Delivering on data

While much focus has been placed on green taxonomies, the largest challenge in measuring the size of the green economy is translating the definition into data. This is mainly due to the lack of disclosure of green products and services, or insufficient granularity in the conventional disclosures to calculate a number.

This problem is similar in other areas of sustainability, such as carbon emissions, and is slowly being addressed by regulatory and voluntary disclosure initiatives. However, until these are fully in place globally, it is necessary to augment disclosed data with direct engagement and estimates to produce consistent global datasets.

One of the main hurdles is taking the step from defining taxonomies to generating company level data, where the level of disclosure is low.

The FTSE Russell Green Revenues 2.0 (GR 2.0) Data Model provides investors with data on more than 3,000 global listed companies that have exposure to the green economy. It addresses important challenges of green economy data – the taxonomy of green activities, tiers of “greenness” and low levels of disclosure of green revenues.

Dissecting green sectors

It is notable that by far the largest sector in the green economy is energy management and efficiency, representing 33% of the economy within the GR 2.0 data.

While renewable energy is one of the highest profile parts of the green economy, areas such as water, pollution control, waste, sustainable food & agriculture are also important – although they are discussed less.

The green economy is clearly diversified, both by company size and geography. However, certain areas such as Europe and Japan are more exposed, and from an industry perspective, almost two thirds come from utilities, technology, and industrial goods and services.

In the rapidly evolving world of green products and services, we expect the market to continue to grow, and for new activities develop. In line with this, the GR 2.0 dataset will help investors analyse the opportunity and their exposure to it, and to look for potential winners and losers.

Maximising the green economy

FTSE Russell and the London Stock Exchange Group have a long history in the development of taxonomies of green products and services, and their application in data and investment products.

In 2008, FTSE launched the Environmental Markets Classification Systems, which focused on the companies most exposed to the green economy. It also launched the Environmental Markets Index Series and formed the Environmental Markets Governance Committee (now the Green Industries Committee). In 2013, the Green Revenues Classification System was launched, to analyse the broader global equity market for green economy exposure.

GR 2.0 was launched five years later, further developing the Green Revenues process, with the report, “Investing in the global green economy: busting common myths,” published based on an initial set of GR 2.0 data.

With the ever-sharper focus on the green economy via national taxonomies, climate targets and new technologies, along with improving corporate disclosure, the key challenge will continue to be creating consistent datasets – which GR 2.0 aims to address by identifying the largest and highest-profile sectors as well as the commonly overlooked ones.

Read the full research paper here

Authors from FTSE Russell: Lee Clements, head of sustainable investment solutions; Lily Dai, senior sustainable investment research lead; and Claire Hugo, sustainable investment analyst.