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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?


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


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

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ap ($

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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.”


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2009 2010 2011 2012 2013 2014 2015 2016 2017

Foss

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Green Economy

Fossil Fuels

Industrial G

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y

Personal &

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oodsRetail

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Chemicals

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Basic Resources

Travel &

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Autom

obiles &

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Media

Telecomm

unications

Construction &

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ls

Investment In

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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.

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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.


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

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62%23%

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● Large Cap● Mid Cap● Small Cap


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%

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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.


Figure 9. Green economy by ICB Supersector

Figure 10. ICB Supersectors by green exposure



0%

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Utilitie

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n & Materia

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s & Parts

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nology

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urces

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re

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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

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Food & Beverage

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hold Goods

Investment In

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Oil & G

asRetail

Teleco

mmunicatio

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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%


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 &

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hold Goods

Investment In

struments

Oil & G

asRetail

Teleco

mmunicatio

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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

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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


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


Conclusion

Thegreeneconomyisasignificant,growing,globalmarketopportunitywhichisdiversifiedacrosscompanysize,geographyandindustrysector.TheFTSERussellGreenRevenuesmodelhelpstodefineandquantitativelymeasurethetransitiontoasustainableand“green”economy.Itcanhelpinvestorsunderstandtheirexposuretothegreeneconomyandimplementtheirinvestmentstrategies.Thisalsoenablesameasureof"positiveimpact"andcanbeusedtodefineandapplygreenallocationprioritiessuchasmeetingChristianaFigueres’challengetoinvestanincremental1%oftotalassetsincleantechnologyandrenewableenergyby2020.17Nolongeralooseconceptthegreeneconomyisnowameasurableanddefinableinvestmentpriority.

17ChristianaFigueres,previouslyexecutivesecretaryoftheUNFrameworkConventiononClimateChange,speakingatPRIConferencein September2017.

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