This paper provides an overview of the importance of the green economy and how it can be beneficial in business and finance operations. There are several key benefits identified in this paper, the most notable being the investment opportunity of the green economy. It is the fastest growing sector of the equity market, totalling about US$4 trillion market cap, which is equivalent to 5% of the total listed equity market. The paper is separated into four sections which help break down what the green economy is, the impact of the green economy, the diversification potential of the green economy and how it can be implemented in practice.

Throughout the paper FTSE Russell uses its own taxonomy, the Green Revenue 2.0 (GR 2.0) data model, using real company data, other taxonomies, and environmental objectives to facilitate full quantitative analysis of the green economy.

The first section defines the green economy as influenced by several factors including: products and services which are used to mitigate environmental issues; internal operations of companies which produce products with lower environmental footprints compared to the rest of their respective industry; industries in transition and the involvement or netting off activities which cause significant environmental harm. The paper notes some of the data challenges that arise from defining the green economy which are attributable to the lack of consistent data. FTSE Russell have developed the GR 2.0 dataset of green products and services to help combat this data issue.

The next section measures the size of the green economy, valued at US$4.3 trillion (2020) investment opportunity and 5.4% of the global listed equity market. In this section the paper compares the green economy to various industries and sectors and green economy performance against these sectors. In recent years, the green economy has been growing in both absolute and relative terms to the market, which has been highlighted with governments and other organisations such as the United Nations mobilising greater investment in climate finance.

The third section discusses how the green economy is relevant in all aspects of business across the world. The paper finds that the green economy is diverse across all size organisations, predominantly large cap organisations involved in green products and services. This section also reveals that Japan and European countries such as Germany and France have high levels of green exposure compared to that of Asia and the US.

The last section explores how the green economy is used in a diverse set of activities throughout value chains. Unsurprisingly, energy management and efficiency rank highest in use by the green sector, which indicate their capacity to mitigate climate change and other environmental risks.

The green economy should not be thought of as limited in size, small cap dominated, lacking diversification or underperforming. Rather it is substantial, growing, diversified, multifaceted, global and outperforming. Thus it is vital to addressing climate change and other environmental issues, and investors should view it as an attractive investment opportunity with added sustainability benefits.

1. The role of the investor is critical in mobilising climate finance with both clients and regulators increasingly looking to financial institutions to increase investment in the green economy.
2. Many countries have started creating their own green taxonomies with the European Union green taxonomy being the most developed. United Kingdom, China, Japan and Malaysia have started developing taxonomies, with a similar focus to mobilise climate finance.
3. FTSE Russell have included three tiers of “greenness of the activities” in their green taxonomies which focuses on the activity level rather than the company level. This categorisation is based on the level of net environmental benefits to help investors navigate the green economy. Tier 1 ‘clear and significant’: includes solar, recyclable products and materials and waste management. Tier 2 ‘net positive’: includes flood control, cloud computing, smart city design and engineering. Tier 3 ‘limited’: includes nuclear, biofuel, key raw materials, and minerals.
4. FTSE Russell highlights data challenges as a key deterrent to companies investing in the green economy. This is due to a number of reasons including: companies not disclosing green revenues; severe underestimating in the market cap of the green economy due to traditional measures and the use of market capitalisation measures to identify the green economy investment opportunity.
5. The green economy was slightly smaller than the oil and gas sector in 2018, albeit due to fall in oil prices in 2020 dropping the sector to ~3% of the market, the green economy has since surpassed the oil and gas sector.
6. Climate issues have made investment in the green economy more prominent with annualised growth rate of ~8% in 2018. The future for the green economy looks strong with these climate issues only going to be exacerbated in future years, if action is not to be taken by governments, investors and businesses. The report predicts that in 2030, the green economy will be at 10% for climate goals to be achieved.
7. From 2016-2018 there has been growth in new sub-sectors which represent the expansion of new green activities such as energy efficiency and efficient IT, recycling and the rise of electric vehicles.
8. The green economy growth will need to accelerate to meet investment level outlined of keeping global warming within two degrees.
9. The US and China represent the two largest areas of the market, however their combined exposure to the green economy is only at the global average of 5%. Japan and European countries such as, Germany and France, have high levels of green exposure.
10. FTSE Russell’s Green Revenue 2.0 data model addresses the key ongoing challenges of green revenues data, taxonomy, granularity and disclosure.