Green economy a multi-trillion dollar opportunity: FTSE Russell

The global green investment economy is growing faster than the overall equity market and currently represents a US$4 trillion market cap opportunity, according to research from FTSE Russell.

FTSE Russell Green Revenues 2.0 Data Model has identified more than 3,000 global listed companies that have exposure to the green economy to greater or lesser extents - an equivalent of over 5% of the total listed equity market.

FTSE Russell identifies a number of different ways where the green economy resides - products and services such as solar power or high energy efficiency products; companies with internal operations that produce products or services with lower environmental footprints than the rest of its industry sector; industries in transition, and companies with involvement/netting off of "dirtier" activities or combining with broader sustainability issues such as social and development.

FTSE Russell uses disclosed data, disclosure from engagement from companies, and then uses an internal team to model data based on estimates from available information, said Lee Clements, head of sustainable investment solutions at FTSE Russell.

"We concentrate on getting all of that data where it's available," he said. "We then do that model to estimate based on the industry subsector what the likely revenues are, as long as the analysts have identified that the company is selling green products and services. If we can't identify it, it won't appear in our database."

By identifying green revenue sources, FTSE Russell clients can begin to tilt portfolios towards companies that are making positive impacts, Clements noted.

"We've started by identifying 6% of green revenue exposure in the global equity market, so if you start tilting on that basis, you can get a bigger impact," he said. "That's why we have a family of indices that use green revenue, and you see a difference there because you're tilting on the basis of green revenue, and if you double that exposure, that's a positive impact."

The number of companies and the sectors that they come from are diversifying as well, Clements said.

"We're constantly looking at and refining our taxonomies, and since 2008, there have been a number of areas that have expanded there," he said. "We had very little agriculture in the past, and there's also a lot more focus on tech and making tech more efficient, because increasingly IT is a big user of energy and is also a big source of solutions as well. These areas are all evolving."

The green economy is both diversified by company size and geography, FTSE Russell said, although certain areas such as Europe and Japan are more exposed. From an industry perspective, almost two thirds of the green economy come from utilities, technology and industrial goods and services.

Identifying the exact scope of the green economy is hindered by the limited but evolving data.

"The real challenge has been on the data, and is a common thing that we're still seeing within Europe with the EU taxonomy work," Clements said. "It's a very difficult metric to get the number for a large part of the green economy. We've looked at 16,000 companies, and only about 20% of those can actually disclose their exposure to green products and services, in terms of revenue. We engage with them, get direct information, and that takes it up to the 28%. We find higher disclosure for the smaller, more focused green companies - renewable energy or something like that."

FTSE Russell said that universe of green products and services is evolving rapidly, meaning the market will continue to grow.

"That remains the biggest challenge for investors and for us," Clements said. "The way we went about it is that you can do this in a purely modelling way, but the problem is that you've only got a certain part of the green economy that is disclosing. You do get increasingly good disclosure around aspects of the green economy involvement. They may not tell you specifically the revenue, but they might tell you what proportion of their products are green - electric cars versus non-electrics, boilers that meet the highest energy efficiency standards, if it's a large engineering contractor and they've done contracts, which ones are building water-based projects, etc."

Read more: green economyFTSE Russell GreenLee ClementsEU taxonomy
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