Taking advantage of investment opportunities offered by the energy transition while complying with evolving regulations will depend on granular data backed by in-depth expertise.
- The potential reward for investing in the green economy is supported by the need for solutions to climate change.
- Yet the success of any environmental portfolio depends on in-depth data.
- Our Green Revenues data also provides a steppingstone for compliance with the EU taxonomy regulation.
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When the latest UN Environment Programme Emissions Gap Report was published in October 2022, it estimated that US$4-6 trillion of investment will be required globally every year for the transition to a low-carbon economy. This highlights both the huge reallocation of capital needed and the opportunity it brings.
Indeed, the potential reward for investing in the green economy can be significant.
For instance, the FTSE Environmental Opportunities All Share Index has generated an 8 percent annual return over the last five years and outperformed its benchmark FTSE Global All Cap by 2.5 percent.1
The environmental opportunities index focuses on companies with at least 20 percent of their revenues derived from green products and services.
Green Revenues: A structure, measurement methodology and process to meet client demand for quality data to help monitor contributions to the growing green economy
Solutions for climate change
Supported by the need to deliver solutions to climate change, the longer-term outperformance has been remarkable.
Green economy stocks have lagged the broader markets for much of 2022, however, due to extended valuation premiums following an especially strong performance in 2020 and 2021.
To give an idea of the size of the fast-developing opportunity, in 2022 some 108 London Stock Exchange-listed companies have received its Green Economy Mark – a world-first accreditation for London-listed issuers generating more than half their revenues from green products and services.
With a combined market capitalisation of £156bn, the cohort contributes to objectives such as climate change mitigation, adaptation, waste and pollution reduction, the circular economy, and sustainable agriculture.
Looked at globally, over the 12 years to 2021 the green economy has doubled its share of the global investable market, from 4 percent to over 7 percent.2
Overcoming the lack of granular data
When it comes to finding environmental investment opportunities, the main challenge is the lack of granular, consistent and reliable data for evaluating companies’ green products and services, as corporate reporting remains limited. Indeed, although green taxonomies are proliferating globally, improvements in disclosures are likely only to be gradual.
The success of any environmental investment portfolio, therefore, depends on in-depth data, combining both high-quality public data and expert analysis that plugs information deficits.
Our FTSE Russell Green Revenues data is designed to do exactly that.
It measures the green revenues for over 18,000 companies, primarily using disclosed information, which is carefully curated and analysed by our in-house experts.
Where that information is lacking, though, we compensate for low levels of disclosure through robust, bottom-up estimates of revenues from each company’s green activities.
To give an idea of the granularity that’s required, we classify businesses that have green revenues across sectors.
FTSE Russell Green Revenues Classification System
FTSE Russell Green Revenues Classification System sector split
Our classification system also grades the level of environmental benefits of a company’s activities as tier one, two or three. For example, Japan’s Government Pension Investment Fund, the world’s largest pool of retirement savings, uses the Green Revenues data to assess Japanese companies’ contribution to climate change action.3
Complying with EU taxonomy legislation
In addition, our Green Revenues data provides an important steppingstone for investors to comply with the EU taxonomy regulation. Yet while the data supports the EU taxonomy, it also goes beyond what the taxonomy requires to give the type of information needed to support investment decisions.
Almost a year after its introduction, many investors perceive that the taxonomy does not help their decision-making about where green investing opportunities lie.
However, the EU Platform on Sustainable Finance’s Recommendations on Data and Usability, published in October 2022, proposes a series of recommendations to improve the practicality of the taxonomy. At close to 200 pages, its recommendations are, broadly speaking, a step forward, improving its usability and resolving some of the taxonomy’s initial difficulties.
Going further, the recommendations state that estimates of what’s green and what’s not – such as when an oil and gas company does not split out its renewable energy and fossil fuel revenues – should be avoided for the purposes of compliance with the taxonomy.
However, we believe that investors need this level of detail to reduce the risk of greenwashing, which is why we make estimates of green revenues and non-green revenues.
It’s important to be aware that these estimates vary from one data vendor to another, as do estimates of companies’ Scope 3 carbon emissions.
Few data vendors provide the level of granularity in our Green Revenues data, with the estimates of green revenues compensating for the fact that corporate accounting standards do not yet ask for full disclosure.
Green economy growth is accelerating
Looking forward, the green economy’s growth is expected to accelerate as the world races towards implementing net zero commitments. This transition brings great opportunities for investors, as well as the need to comply with regulations from the EU and other regulatory authorities that are evolving fast.
Finding the investment opportunities while ensuring continuous compliance will depend on high-quality data that can adapt as time goes by: this takes the type of in-depth expertise and scale that only a few organisations possess.
FTSE Russell Green Revenues data is now available across both FTSE Russell and Refinitiv solutions. Discover more about the data and its uses.
1. Compound annual return measured over 5 years, as of 31 October 2022. FTSE Environmental Opportunities Index Series Factsheet
2. FTSE Russell GER 2022.
3. GPIF Publishes the “FY2021 Analysis of Climate Change-Related Risks and Opportunities in the GPIF Portfolio” | Government Pension Investment Fund