Investing in the global green economy: busting myths

Investing in the global green economy: busting common myths

Until now the transition to a sustainable and “green” economy¹ has been a loose concept rather than a defined, investable, industrial system. This lack of definition and data has led to the impression that it is of limited size; small cap dominated; lacking diversification and that investors give up performance in exchange for environmental benefits. However, analysis by FTSE Russell dispels these stereotypes. It finds a large investment opportunity, backed by global efforts to combat climate change and broader environmental challenges. The opportunity is diversified across company size, geography and sector and has delivered outperformance of the global equity market.

Key features of the green economy

Based on FTSE Russell’s calculations:

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It’s substantial: The green economy represents 6% of the market capitalisation of global listed companies, approximately US$4 trillion. This represents a significant investment opportunity, approximately the same size as the fossil fuel sector.

It’s growing: The green economy proportion of the global market capitalisation has grown, while the fossil fuel sector has shrunk.

It’s diversified: The green economy is diversified by company size. While small and mid cap companies have a greater green exposure and represent a larger number of green companies, the market is by no means small and mid cap dominated; large cap companies represent approximately two thirds of green market capitalisation.

It’s multifaceted: The green economy is diversified across ICB^® Supersectors². Industrial Goods and Services are the largest element, followed by Utilities, Technology, Chemicals, and Construction and Materials. This highlights the diverse nature of goods and services addressing environmental challenges.

It’s global: The US is the largest element of the green economy; however Japan and Europe have the highest green exposure. While China is the third largest element of the green economy; its green exposure is underweight but growing rapidly.

It’s outperforming: Green companies have shown outperformance with FTSE Russell’s broadest green indexes outperforming their parent benchmarks over the last five years.

Source: FTSE Russell, data as at March 2018. See FTSE Russell’s annual trends report, “Investing in the global green economy: busting common myths”, 2018

A significant, growing market opportunity

The green economy is a significant, growing, global market opportunity which is diversified across company size, geography and industry sector. No longer a loose concept the green economy is now a measurable and definable investment priority.

Read the full green economy report

1     Note that in this article we are treating the global public equity universe as a proxy for an economy wide assessment. As such our definition of the “green economy” is global listed equity market capitalisation weighted by the green revenues as a proportion of total revenues rather than a macroeconomic assessment of global GDP.

2     Industry Classification Benchmark (ICB) is a globally recognised standard, operated and managed by FTSE Russell, for categorising companies and securities across four levels of classification. http://www.ftserussell.com/financial-data/industry-classification-benchmark-icb