ftserussell.com Investing in the global green economy: busting common myths Defining and measuring the investment opportunity
ftserussell.com
Investing in the global green economy: busting common mythsDefining and measuring the investment opportunity
Contents
3 Executive summary
4 Green economy features
5 Size and growth of the green economy
8 Diversificationbysize,sectorandgeography
13 Investmentperformanceofgreencompanies
14 Conclusion
3Annual trends report 2018
Untilnowthetransitiontoasustainableand“green”economy1 has beenalooseconceptratherthanadefined,investable,industrialsystem. Thislackofdefinitionanddatahasledtotheimpressionthatitisoflimitedsize;smallcapdominated;lackingdiversificationandthatinvestorsgiveupperformanceinexchangeforenvironmentalbenefits.However,analysisbyFTSERusselldispelsthesestereotypes.Itfindsalargeinvestmentopportunity,backedbyglobaleffortstocombatclimatechangeandbroaderenvironmentalchallenges.Theopportunityisdiversifiedacrosscompanysize,geographyandsectorandhasdeliveredoutperformanceoftheglobalequitymarket.
Executive summary
1Notethatinthispaperwearetreatingtheglobalpublicequityuniverseasaproxyforaneconomywideassessment.Assuchourdefinitionofthe“greeneconomy”isgloballistedequitymarketcapitalizationweightedbythegreenrevenuesasaproportionoftotalrevenuesratherthanamacroeconomicassessmentofglobalGDP. 2 IndustryClassificationBenchmark(ICB)isagloballyrecognizedstandard,operatedandmanagedbyFTSERussell,forcategorizingcompaniesandsecuritiesacrossfourlevelsofclassification:10industries,partitionedinto19supersectors,whicharefurtherdividedinto41sectors,whichthencontain114subsectors.http://www.ftserussell.com/financial-data/industry-classification-benchmark-icb 3SeeFigure13,indexesoutperformingoverfiveyearstoMarch2018.
Key features of the green economyBasedonFTSERussell’scalculations:
It’s substantial:Thegreeneconomyrepresents6%ofthemarketcapitalizationofgloballistedcompanies,approximatelyUS$4trillion.Thisrepresentsasignificantinvestmentopportunity,approximatelythesamesizeasthefossilfuelsector.
It’s growing:Thegreeneconomyproportionoftheglobalmarketcapitalizationisgrowing,whilethefossilfuelsectorshrinks.
It’s diversified:Thegreeneconomyisdiversifiedbycompanysize.Whilesmallandmidcapcompanieshaveagreatergreenexposureandrepresentalargernumberofgreencompaniesthemarketisbynomeanssmallandmidcapdominated;largecapcompaniesrepresentapproximatelytwothirdsofgreenmarketcapitalization.
It’s multifaceted:ThegreeneconomyisdiversifiedacrossICB2 Sectors. Industrials arethelargestelement,followedbyUtilities,Technology,Chemicals,andConstructionandMaterials.Thishighlightsthediversenatureofgoodsandservicesaddressing environmental challenges.
It’s global:TheUSisthelargestelementofthegreeneconomy;howeverJapanandEuropehavethehighestgreenexposure.WhileChinaisthethirdlargestelementofthegreeneconomy;itsgreenexposureisunderweightbutgrowingrapidly.
It’s outperforming:GreencompanieshaveshownoutperformancewithFTSERussell’sbroadestgreenindexesoutperformingtheirparentbenchmarksoverthelastfiveyears.3
4 Annual trends report 2018
Green economy features
BasedonFTSERussell’scalculations
SubstantialRepresents6%ofthemarketcapitalizationofgloballistedcompanies
GrowingGrownasaproportionofthetotalmarket,whilethe fossil fuels sector has shrunk
Multifaceted Diverse industries and sectors addressing environmental challenges
Diversified Representsallcompanysizes;small,midandlargecap
Global Broadgeographicalcoverage with the US having the largest exposure
OutperformingFTSERussell’sgreen indexes have outperformedtheirparentbenchmarkoverthe last 5 years
Whatdowe knowabout
the green economy?
5Annual trends report 2018
Size and growth of the green economy
Therehasbeenextensivediscussionoftheemergenceofanew,greeneconomybaseduponcleantechnologiesandgreeninfrastructure.
ItisestimatedbytheGlobalCommissionontheEconomyandClimate,co-chairedbyLordNicholasStern,thatUS$90trillionofinvestmentisneededby2030toavertmorethan2degreesofglobalwarmingsincepre-industriallevels.4 Thishugecapitaldeploymentprovidessignificantopportunitiesforthecompaniesinvolvedandforinvestorswhoaligntheirportfolios.However,giventhecrosscuttingnatureoftheopportunity,itdoesnotalwaysfitwithinvestorstraditionalviewofsectorsandgeographiesandthestereotypeisthatitisaminoropportunityfocusedonvolatile,smallcapstocks.
Oneofthechallengesofaddressingthegreeninvestmentopportunityhasbeenalackofdefinitionanddata.Beyondhighlevel,andinmanycasesdiffering,viewsofwhatmightbeconsideredgreen/environmentalactivitiesorasmallnumberoffocusedrenewableenergycompaniesthereislimitedconsistent,globalcoverageofthesector.Thereisnoconsistenttaxonomyofgreenproductsandservicesanditisnottypicallydisclosedwithanyspecificitybycompanies.Assuchdefiningandcreatingacoherentinvestmentstrategy,beitpassiveoractive,ischallengingcomparedwiththeequivalentforatraditionalindustrysectororgeography.
FTSERussellhastakenabroadviewofthegreeneconomyaimingtocaptureproductsandservicesinrenewableandalternativeenergy,energyefficiency,water,andwasteandpollution.Theyareanalyzedbasedontheirimpactonclimatechangemitigationandadaptation,water,resourceuse,pollution,andagriculturalefficiency.Individual,listedcompaniesareanalyzedbasedontheirexposuretothesesectors,withascorebasedonthepercentageoftheirrevenuesderivedfromtheseproductsandservices.5 Thesescoresarethenaggregatedup;weightedbythecompany’sinvestablemarketcapitalizationtogenerateanoverallexposureatcountry/sectorlevelandultimatelyanoverall,globalexposureestimate.
4TheSustainableInfrastructureImperative:FinancingforBetterGrowthandDevelopment,GlobalCommissionontheEconomyandClimate,October2016. 5SeeFTSEGreenRevenues.http://www.ftserussell.com/index-series/index-spotlights/green-revenues
"Significant investment is needed over the next 15 years: around US$90 trillion, which is more than the entire current [infrastructure] stock." The Sustainable Infrastructure Imperative Report4
GlobalCommissionontheEconomyandClimate
6 Annual trends report 2018
Figure 1. ICB Supersectors plus green economy ranked by market capitalization
Source: FTSE Russell as at December 2017.
1 2 3 4 5 6 7 8 9
To
tal M
kt C
ap ($
trn)
Industrial G
oods & Serv
ices
Technology
Banks
Health Care
Oil & G
as
Green Econom
y
Personal &
Household G
oodsRetail
Food & Bevera
ge
Real Estate
Insurance
Financial Serv
ices
Chemicals
Utilities
Basic Resources
Travel &
Leisure
Autom
obiles &
Parts
Media
Telecomm
unications
Construction &
Materia
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Investment In
strum
ents
6Sumofinvestablemarketcapitalizationofgreenrevenuecompanies,weightedbytheirgreenrevenuespercentagedividedbysumofallcompaniesmarketcapitalization. 7Sumofinvestablemarketcapitalizationofgreenrevenuecompanies,weightedbytheirgreenrevenuespercentage.
Overallwecalculatethatapproximately6%ofthegloballistedequitymarketisderivedfrom the green economy.6ThisisasignificantinvestmentopportunityrepresentingalmostUS$4trillioninmarketcapitalization.7The green economy is similar in size to theICBOilandGasSupersector,towhichitisoftencompared.
Thereareapproximately3,000global,listedcompanieswithexposuretothegreeneconomy.Thisnumberhasrisenbyapproximately20%since2009andcovers30%ofglobal,listedmarketcapitalization.Theoverallexposureofthegreeneconomyhasalsogrown,particularlyfrom2013.
“There are approximately 3,000 global, listed companies with exposure to the green economy.”
7Annual trends report 2018
0%
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8%
10%
12%
4.6%
4.8%
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6.0%
6.2%
2009 2010 2011 2012 2013 2014 2015 2016 2017
Foss
il Fu
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ecto
r (%
of M
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ap)
Gre
en E
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(% o
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)
Green Economy
Fossil Fuels
Industrial G
oods & Serv
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Technology
Banks
Health Care
Oil & G
as
Green Econom
y
Personal &
Household G
oodsRetail
Food & Bevera
ge
Real Estate
Insurance
Financial Serv
ices
Chemicals
Utilities
Basic Resources
Travel &
Leisure
Autom
obiles &
Parts
Media
Telecomm
unications
Construction &
Materia
ls
Investment In
strum
ents
Figure 2. Growth of the green economy vs fossil fuel sector9
Source: FTSE Russell, data as of December 2017. Please see the end for important legal disclosures.
Source: FTSE Russell, data as of December 2017. Please see the end for important legal disclosures.
8 PercentageofmarketcapitalizationfromICBOil&GasProducersandOilEquipment,Services&DistributionSectorsandCoalMiningSubsector. 9GreeneconomysizebasedonaproportionofthetotalinvestablemarketcapitalizationincludingFTSEGlobalEquityIndexSeries,ChinaLarge&MidCapAShares,Russell3000®,UKAllShare&JapanAllCapIndexes. 10 CurrentTrajectoryestimatebasedonextrapolationofgrowthbasedonaveragegrowthratefrom2009to2017.AcceleratedGreenInvestmentestimatebasedonassumedrate$90tnofgreeninfrastructureinvestmentover15yearsgeneratinganadditional$6tngreenrevenuesin2030.Assumeonetimepricetosalesratioand3%growthfortherestofthemarket.
5%
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7%
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9%
10%
2009
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Gre
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)
Accelerated GreenInvestment
Current Trajectory
Figure 3. Potential future growth trajectory10
Asasubstantialandgrowingmarketsector,thegreeneconomyprovidesasignificantopportunityforinvestors.Ithasgrownasaproportionofthetotalmarket,whilethefossil fuel sector has shrunk.8Ifitcontinuesitscurrenttrajectoryitcouldrepresent7%ofglobalmarketcapitalizationby2030.Ifgreeninvestmentacceleratesto~$90trillionlevelsuggesteditcouldreach~10%,asimilarsizetoglobalhealthcare.
8 Annual trends report 2018
Mixture of large, mid, and small caps Asthegreeneconomyhasgrown,largecapcompanieshavebecomemoreinvolved.Theyhavedevelopedandconsolidatedthemarket,acquiringsmaller,fastermovingrivals.Assuchapproximatelytwothirdsofthegreeneconomyisnowmadeupoflargecapcompanies(bymarketcapitalization).
Thereisstillagreaternumberofsmallandmidcapcompaniesinvolvedinthegreeneconomyandtheirfocusongreenrevenues(asmeasuredbytheirgreenrevenuesasaproportionoftotalrevenues)ishigher.Arguablytheymaybedrivinginnovationinthegreeneconomy,eveniftwothirdsofthesizeofthemarketcomesfromlargecompanies.
Source: FTSE Russell, data as of December 2017
Figure 4. Green economy by company size11
Diversification by size, sector and geography
Figure 5. Number of green companies by size Figure 6. Green exposure by company size
11CompanysizeasdefinedbyFTSERussellintheFTSEGlobalEquityIndexSeriesonaregionrelativebasis.
Source: FTSE Russell, data as of December 2017 Source: FTSE Russell, data as of December 2017
0
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Large Cap Mid Cap Small Cap
Num
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nues
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Large Cap Mid Cap Small Cap
Gre
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ues
%
62%23%
16%
● Large Cap● Mid Cap● Small Cap
9Annual trends report 2018
Figure 7. Green economy by green sector13
● Energy Management & Efficiency● Energy Generation● Food & Agriculture● Transport Equipment● Water Infrastructure & Technology● Energy Equipment● Waste Management & Technology● Environmental Resources● Transport Solutions● Pollution Control & Prevention● Environmental Support & Services
40%5%
11%
6%
8%
8%
7%
5%
3%
2%
4%
Source: FTSE Russell, data as of December 2017
Source: FTSE Russell, data as of December 2017
Figure 8. Largest companies in the green economy14
Company % of Market Green activities
Microsoft 2.4 Cloudinfrastructure&videoconferencing
TSMC 2.4 Highefficiencyelectronics
ChinaYangtzePower 1.4 Hydroelectricpowergeneration
ABB 1.1 Highefficiencypowerinfrastructure&industrialautomation
Amazon 1.1 Cloud infrastructure
Tesla 1.1 Electric vehicles
Monsanto 1.0 Highyielding&droughtresistantseeds
WasteManagement 1.0 Wastemanagement&recycling
Siemens 0.8 Renewableenergyequipment,watertreatmentequipment,mobilitysolutions&highefficiencypowerinfrastructure,industrial&building
NextEra Energy 0.7 Renewable&lowcarbonpowergeneration
Honeywell 0.7 Automotive&buildingenergyefficiency
Diverse range of green industries Thegreeneconomyismadeupofadiverserangeofproductsandservicesaddressingmultipleenvironmentalchallenges.Thelargestelementisfromenergyefficiency,averydiversesegmentrangingfrombuildinginsulationtocloudtechnology.12Thesesolutionscanoftenhavesignificantenvironmentalbenefitsaswellasbeingthemostcosteffective,assuchitisunsurprisingtheyarethelargestsegmentofthegreeneconomy.Alternativeenergycoversbothnewertechnologies,growinganddiversifyingrapidly,suchassolar,andmoreestablishedtechnologies,suchaslargehydroelectric.Resourcesarealsoakeyareaofthegreeneconomy,suchaslithiumforbatteries,lightweightmaterials,organicfoodsorseedsdevelopedtoboostagriculturalyields.
Thelargestcompaniesinthegreeneconomyareamixofbothcompanieswherethemajorityoftheirrevenueisgreen,suchasTeslaorWasteManagementInc,andlargecompanieswhereaminoritysub-segmentisgreen,suchasMicrosoftorSiemens.
12CloudcomputingtechnologiescanreduceCO₂emissionsbyupto90%,CloudComputingandSustainability:TheEnvironmentalBenefitsofMovingtotheCloud,Accenture,2010. 13 Aggregatedsectors,basedonlargestgreensectorpercompany. 14 Largestcompaniesbymarketcapitalizationweightedbygreenrevenuesasaproportionoftotalrevenues.%ofmarketinthetableisthecompany’smarketcapitalizationweightedbygreenrevenuesasaproportionoftotalrevenuesdividedbytotalmarketcapitalizationweightedbygreenrevenuesasaproportionoftotalrevenues.
10 Annual trends report 2018
Figure 9. Green economy by ICB Supersector
Figure 10. ICB Supersectors by green exposure
Source: FTSE Russell, data as of December 2017
Source: FTSE Russell, data as of December 2017
0%
5%
10%
15%
20%
25%
30%
Gre
en R
even
ues
%
Utilitie
s
Constructio
n & Materia
ls
Industrial G
oods & Service
s
Chemicals
Automobile
s & Parts
Tech
nology
Basic Reso
urces
Travel & Leisu
re
Food & Beverage
Personal &
House
hold Goods
Investment In
struments
Oil & G
asRetail
Teleco
mmunicatio
ns
Real Esta
te
Health Care
Insurance
Financial S
ervices
MediaBanks
Diverse industry exposureThegreeneconomyisrepresentedacrossmostofthetraditionalindustrysectorsasdefinedbyICB.Itisdiversifiedacrossbothcyclicalsectors,suchasICBIndustrials,anddefensivesectors,suchasICBUtilities.Thesearethetwolargestsectorsinthegreeneconomy,representingUS$1.3trillionandUS$0.6trillionofmarketcapitalizationrespectively,47%ofthetotal.ThesetwoICBSectorsalsohavesignificantlyhigherpercentageofgreenrevenuesthanthemarketaverage.Technology,thethirdlargestICBSector,hasalowergreenrevenuesfocus,butgiventhedevelopmentofinnovativenewgreentechnologiesitisakeygrowtharea,inparticularforEnergyEfficiency.ICBChemicalsandICBConstructionandMaterialsrepresentadifferenttypeofopportunitytomeetthenewresourcerequirementsfordevelopinggreeninfrastructure.TherearealsocertainICBSectorswhichare,bynatureoftheiractivities,underweightinthegreeneconomy;inparticularICBHealthCare,TelecommunicationsandFinancials.
Overall the green economy is concentrated in certain traditional ICB Industrial Sectors,howeverwithintheseitisexposedtoarangeofdifferenttypesofcompaniesallowinganinvestortodevelopadiversifiedportfolio.
Utilitie
s
Constructio
n & Materia
ls
Industrial G
oods & Service
s
Chemicals
Automobile
s & Parts
Tech
nology
Basic Reso
urces
Travel & Leisu
re
Food & Beverage
Personal &
House
hold Goods
Investment In
struments
Oil & G
asRetail
Teleco
mmunicatio
ns
Real Esta
te
Health Care
Insurance
Financial S
ervices
MediaBanks
● Industrial Goods & Services● Utilities ● Technology● Chemicals● Construction & Materials● Automobiles & Parts● Oil & Gas
14%
33%
14%
8%
7%
5%
3%3%
3%3%
2%
● Basic Resources● Personal & Household Goods● Food & Beverage● Travel & Leisure● Health Care● Retail● Other
2%2%1%
11Annual trends report 2018
Broad geographical coverage
Figure 11. Green economy by country of domicile
Figure 12. Average green exposure of companies by country of domicile15
Similartotheglobalmarket,theUSisbyfarthelargestexposure.HoweverdespitebeingaleaderinareassuchascloudtechnologytheUSisslightlybelowtheglobalaverageintermsofgreenrevenuesexposure.Japanhasalargegreenrevenuesexposure,beingaleaderinareassuchaselectricrail,overweightingthecountrytosecond largest in the green economy. China is underweight as it has slightly lower greenrevenuesexposure(althoughboththenumberofgreencompaniesandtheirexposureisgrowingrapidlyandsomeofthegreencompaniesareunlisted).Europeisasignificantpartofthegreeneconomyandwouldbethesecondlargestpartasagroup.GermanyandFranceareparticularlylarge,overweightandwithhigherthanaveragegreenexposure.
Fortheinvestortherearesomevariationsofgeographicalexposurecomparedwiththeglobalmarketbutenoughbreadthtocreateagloballydiversifiedportfolio.
15Top10countriesofthegreeneconomybygreenweightedmarketcapitalizationofthecompaniesbycountryofdomicile(plusEuropeaggregate).Orderedbyaveragegreenrevenueasaproportionoftotalrevenue.
Utilitie
s
Constructio
n & Materia
ls
Industrial G
oods & Service
s
Chemicals
Automobile
s & Parts
Tech
nology
Basic Reso
urces
Travel & Leisu
re
Food & Beverage
Personal &
House
hold Goods
Investment In
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Oil & G
asRetail
Teleco
mmunicatio
ns
Real Esta
te
Health Care
Insurance
Financial S
ervices
MediaBanks
Taiw
an
Japan
Germany
France
Europe
Switzerla
ndKorea
United States
China
Canada
United Kingdom
● United States● Japan● China● Germany● Taiwan● France● United Kingdom● Switzerland● Canada● Other
43%
13%
12%
4%
4%
4%
2%
3%2%
13%
0%2%4%6%8%
10%12%14%16%18%20%
Gre
en R
even
ues
%
Taiw
an
Japan
Germany
France
Europe
Switzerla
ndKorea
United States
China
Canada
United Kingdom
Source: FTSE Russell as of December 2017
Source: FTSE Russell as of December 2017
13Annual trends report 2018
Figure 13. Outperformance of green indexes16
Overthelastfiveyearsgreencompaniesgeneratedhigherreturnsthanthebroaderequitymarket.
FTSERussell’sbroadestgreenindexeshaveoutperformedtheirparentbenchmarksoverthelastfiveyearstoMarch2018.
Index (USD) 5 yr performance total returns %
Outperformance percentage points
FTSEEnvironmentalOpportunitiesAllShare 74.5 +14.3
FTSEEnvironmentalTechnology100 69.4 +9.2
Benchmark:FTSEGlobalAllCap 60.2 0.0
FTSEexFossilFuels 65.6 +5.5
FTSEexCoal 61.0 +0.9
Benchmark:FTSEAll-World 60.1 0.0
FTSEGlobalClimate* 75.1 +1.8
Benchmark:FTSEAll-World 73.3 0.0
FTSEDivest-Invest200* 90.3 +13.0
Benchmark:FTSEDevelopedAllCap* 77.3 0.0
*(GBP)
16PerformanceofFTSERussell’smostsignificantgreenindexesfromMarch2013toMarch2018,USDexceptwhereotherwisenoted.
Source: FTSE Russell, data as of March 2018. Past performance is no guarantee of future results. Returns shown before the index launch date reflect hypothetical historical performance. Please see the end for important legal disclosures.
Investment performance of green companies
14 Annual trends report 2018
Conclusion
Thegreeneconomyisasignificant,growing,globalmarketopportunitywhichisdiversifiedacrosscompanysize,geographyandindustrysector.TheFTSERussellGreenRevenuesmodelhelpstodefineandquantitativelymeasurethetransitiontoasustainableand“green”economy.Itcanhelpinvestorsunderstandtheirexposuretothegreeneconomyandimplementtheirinvestmentstrategies.Thisalsoenablesameasureof"positiveimpact"andcanbeusedtodefineandapplygreenallocationprioritiessuchasmeetingChristianaFigueres’challengetoinvestanincremental1%oftotalassetsincleantechnologyandrenewableenergyby2020.17Nolongeralooseconceptthegreeneconomyisnowameasurableanddefinableinvestmentpriority.
17ChristianaFigueres,previouslyexecutivesecretaryoftheUNFrameworkConventiononClimateChange,speakingatPRIConferencein September2017.
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