28.6.2018

FTSE Russell Annual Trends Report 2018 – Reasons for Investing in the Global Green Economy and Sustainability

The green economy is a significant, growing and global market opportunity for investing with good returns. Investments can also be diversified across company size, geography and industry sector. It can be definable investment priority, gather and analyze relevant data, measure positive impact in sustainability and offer good investment returns, and providing great opportunities to deliver outperformance out of the global equity market returns.

The green companies have generated higher returns than the broader equity market for the past five years.

The proof is for example FTSE Russell’s green indexes, which have outperformed their parent benchmarks over the last five years until March 2018. There are the green economy products and services companies in renewable and alternative energy, energy efficiency, water and waste management solutions that have offered good returns for investments already. There are expectations for good returns in the future too.

The Global Commission on the Economy and Climate, co-chaired by Lord Nicholas Stern, have estimated that 90 trillion USD of investments are needed by 2030 to avert more than 2 degrees of global warming since pre-industrial levels. There are many actors made global commitments to combat the climate change, broader environmental and social challenges. These huge future capital deployments provide significant opportunities for the companies involved and for investors, who align their portfolios accordingly.

What do we know about the green economy?

We know that there are many new clean technologies, green infrastructure and services emerged in the past ten years. We have approximately 3.000 global listed companies in the green economy market. They cover about 30 % of the global listed companies, which represents almost US$4 trillion in market capitalization. The green economy is similar in size to the ICB Oil and Gas sector, in which it is often compared. It has potential and predicted to grow to the size of the global health care sector in the future.

We know that the green economy have a diverse range industries, products and services addressing multiple environmental challenges. The largest is energy efficiency, which includes very diverse segments ranging from building insulation to cloud technology. These solutions have significant environmental and cost efficiency benefits. Renewable and alternative energy solutions includes both newer technologies such as solar and more established technologies such as hydroelectric. Resources are also a key area of the green economy with lithium for batteries, natural fibers for materials, organic foods and seeds for  agriculture. The global green economy is divided int the following industries and listed companies: Energy Management & Efficiency (40 %), Energy Generation (11 %), Food & Agriculture (8 %), Transport (8. %), Water Infra & Tech (7 %), Waste Management & Tech (5 %) and so on.

We know that almost 2/3 of the green economy market is made up by large cap companies, which have become more involved with the market growing and large opportunities risen in the past years. About quarter of the market are covered by mid cap companies and remaining are small cap companies. There are many innovative small and mid-cap companies, which are challenging the market shares and revenues.

We know that US market has large exposure to the green economy revenues. But Japan has also large green revenues exposure with being leader in such areas as in electric rail and cars. China is underweight as it has slightly lower green revenues exposure in public companies, but they have number of green tech companies rising and many unlisted companies growing to be listed in the future. Europe is a significant part of the green economy and revenues especially with large German and France markets with green exposure. For the investor there are some variations of geographical exposure compared with the global market in overall, but there are enough breadth already to create a globally diversified portfolio.

The conclusion is that the global green economy market size is big and grows, includes variety of industries and technologies and services companies to invest with having potential for them to grow, and also allows large potential for geographical portfolio allocation. The green economy has been and is very good investment area for investment returns by data and facts despite variety of myths and diverse views.