The Global Commission on the Economy and Climate estimated that US$90 trillion of investment is needed by 2030 to avert more than two degrees of global warming since pre-industrial levels. This provides significant opportunities for companies, and for investors to align their portfolios with a sustainable “green economy”.

Analyses by FTSE Russell in May 2018 assessed the concept of the green economy as a measurable and definable investment opportunity.   Its findings dispelled the stereotypical ideas that the “green economy” requires investors to give up performance in exchange for environmental benefits, and that it is of limited size, lacks diversification and is dominated by small caps.

Instead FTSE Russell concluded that the green economy is:

1. Substantial. Approximately 6% of the global listed equity market is derived from the green economy, representing almost US$4 trillion in market capitalization. This is similar in size to the Industry Classification Benchmark (ICB) oil and gas supersector, to which it is often compared.  There are approximately 3,000 global listed companies with exposure to the green economy. This number has risen by approximately 20% since 2009 and covers 30% of global listed market capitalisation.
2. Growing. The green economy provides a significant opportunity for investors. It has grown as a proportion of global market capitalisation, while the fossil fuel sector has shrunk.
3. Diversified. Approximately two thirds of the green economy is now made up of large cap companies (by market capitalisation).  While small and mid cap companies have a greater green exposure and represent a larger number of green companies, the market is not small and mid cap dominated.
4. Multifaceted. The green economy is well diversified across ICB sectors, covering products and services that address multiple environmental challenges.  The largest element is industrials, followed by utilities, technology, chemicals, and construction and materials.
5. Global. The US has the largest exposure in areas such as cloud technology, but slightly below the global average in terms of green revenues exposure.  Japan has a large green revenues exposure, being a leader in areas such as electric rail.  China has slightly lower green revenues exposure (although both the number of green companies and their exposure is growing rapidly and some of the green companies are unlisted). Europe is a significant part of the green economy and would be the second largest part as a group.
6. Outperforming. Green companies have generated higher returns, with FTSE Russell’s broadest green indexes outperforming their parent benchmarks in the five years to March 2018.

The model used by FTSE Russell helps to define and quantitatively measure the transition to a sustainable and green economy. It is aimed at helping investors to understand their exposure to the green economy and implement their investment strategies.

1. FTSE Russell believes that there are important opportunities for companies and for investors who align their portfolios in the "green economy" to contribute significantly to the estimated $90 trillion investments needed by 2030 to avert more than two degrees of global warming since pre-industrial levels.
   
2. One of the challenges of addressing the green investment opportunity has been a lack of definition and data. There is no consistent taxonomy of green products and services and it is not typically disclosed with any specificity by companies. The FTSE Russell Green Revenues model helps to define and quantitatively measure the transition to a sustainable and “green” economy.
   
   
3. In defining the green economy, FTSE Russell has taken a broad view, aiming to capture products and services in renewable and alternative energy, energy efficiency, water, and waste and pollution. The aim is to help investors understand their exposure to the green economy and implement their investment strategies for positive impact by defining and applying green allocation priorities.
   
4. As a substantial and growing market sector, the green economy provides a significant opportunity for investors. It has grown as a proportion of the total market, while the fossil fuel sector has shrunk. If it continues its current trajectory it could represent 7% of global market capitalization by 2030, which is similar in size to global health care.
5. As the green economy has grown, large cap companies have become more involved. Approximately two thirds of the green economy is now made up of large cap companies. There is a greater number of small and mid cap companies involved in the green economy and their focus on green revenues is higher. Arguably, they may be driving innovation in the green economy.
6. The green economy is made up of a diverse range of products and services addressing multiple environmental challenges.
7. Over the last five years FTSE Russell have found that green companies generate higher returns than the broader equity market while addressing environmental challenges and enabling positive impact.