‘Greener’ equities, such as those in the FTSE Russell Environmental Technologies 100 index, and the Renewable and Alternative Energy sector, have sold off faster than the market so far this year, reversing strong long-term performance.
‘Investing in the green economy 2022’, the latest annual update on the green economy from the London Stock Exchange Group’s index business, FTSE Russell, said the oil and gas sector saw a better performance than the market over 2021, and particularly this year on the back of high oil and gas prices.
The report said: “Although the short-term performance of the environmental markets is currently challenging, it is unclear whether this weak performance will unfold into a longer-term trend, largely because the drivers of the green economy’s strong long-term performance remain: an increasing focus on climate finance, investors becoming increasingly interested in sustainable investment, green taxonomies coming into force and more have not weakened, and they are likely to continue channeling capital towards the low-carbon transition over time.”
Prior to 2022 the FTSE Environmental Opportunities All Share (EOAS) Index, outperformed the FTSE Global All Cap, by 9.7% over the last three years, and 5.9% over the last five years. The index measures the performance of companies with at least 20% of their revenues derived from environmental products and services.
However, the study highlighted that although the whole green economy has outperformed the market over the last two decades, some green sectors are outperforming others, particularly over the long run and since 2019. Therefore, sustainability-focused investors need to understand the diverse investment characteristics of different green sectors, subsectors and activities.
FTSE Russell Green Revenue data is derived from information disclosed by companies to measure green revenues for over 16,000 equities. If detailed disclosures are lacking, FTSE Russell uses additional data (such as product volumes) to produce 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 goes beyond to cover areas such as waste management and pollution control. Energy management and efficiency represents 39% of the green economy, while transport equipment is the second largest green sector at 20%.
The green economy has grown at an annual compound rate of approximately 14% over the last 12 years. FTSE Russell said the green economy would be the fifth largest industry, comparable in size to the fossil fuel sector, as it has a market capitalisation of more than $7 trillion and makes up 7.1% of global equity markets.
“Future growth estimates imply the green economy could become the first or second largest industry,” added the report.
However, the green economy needs to grow from 7% of the global economy to between 16% and 25% by 2050 to achieve a Net Zero climate target. FTSE Russell said: Much of the capital driving this growth will be channeled toward sectors conventionally thought of green, such as renewable energy and energy management and efficiency, but other sectors will also have a significant role to play, such as food and agriculture, which itself is a large source and potential sink of greenhouse gas emissions.”
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