Green sector gains of $7.2 trillion exceeded only by technology stocks

(July 9): If companies that generate revenue from products and services that help reduce carbon emissions were grouped together as an industry group, they would have the second-best financial performance of any stock sector over the past decade.

Only the technology sector, which has seen massive growth, recently fueled by breakthroughs in artificial intelligence, has outpaced the 198% total returns generated by the so-called green economy over the past 10 years, according to a report by London Stock Exchange Group Plc. And within the green complex, companies focused on energy management and efficiency were the top performers, with renewable energy, the “most visible” component of the green economy, being a “conspicuous laggard,” LSEG said.

While the more than US$100 trillion (RM471.19 trillion) cost of transitioning the global economy from fossil fuels to low-carbon energy sources will create significant investment opportunities, financiers have made clear that private capital will only be deployed where the returns make sense. And while the AI-fuelled tech boom is currently the focus of investors, in the longer term the green transformation is a “mega force” to be reckoned with, LSEG said.

“This is a once-in-a-lifetime investment opportunity,” Jaakko Kooroshy, global head of sustainable investment research at LSEG, said in an interview. Both in terms of “size and performance,” he said.

LSEG defines the green economy by assessing the revenue exposure from green business activities of more than 19,000 companies worldwide. Research shows that more than 4,000 of them generate revenue from green products and services, including everything from generating renewable energy to extracting or processing key minerals needed for batteries and developing recyclable materials.

By this definition, the green economy now has a market capitalization of $7.2 trillion and has recorded a 14% compound annual growth rate over the past decade. Companies with green revenues accounted for about 8.6% of the global listed stock market in April.

LSEG uses the FTSE Russell Environmental Opportunities All Share Index, a benchmark that selects companies with more than 20% green revenue and counts Microsoft Corp, Taiwan Semiconductor Manufacturing Co and Tesla Inc among its largest holdings, as a proxy for the sector. The index has outperformed the FTSE Global All Cap benchmark by 82% since 2008 and is up 32% last year, 10 percentage points more than All Cap.

The biggest driver of the green sector’s outperformance is energy management and efficiency, with a compound annual growth rate of 17% over the past five years. Efficient IT equipment and electronics have now overtaken green building materials as one of the key growth drivers, according to Lily Dai, senior research manager in LSEG’s sustainable investment team.

In fact, the explosive growth of AI and data centers could become the new engine driving the expansion of the green economy. Not only are more energy-efficient chips, servers and cooling systems needed to power AI’s continued march, but Big Tech is also increasingly concerned about the technology’s environmental impact and is looking for sources of more clean energy, LSEG said.

While there is reason to be optimistic about corporate revenue growth from green businesses, LSEG also noted several “headwinds” that could dampen the outlook. The most visible of these are overcapacity in sectors such as solar power and trade barriers related to renewable energy equipment and electric vehicle production, with the US and the European Union raising tariffs on electric vehicles from China.

“Protectionism is a double-edged sword for the green economy,” Kooroshy said. On the one hand, U.S. President Joe Biden’s inflation-reduction bill “has unleashed a huge amount of demand and subsidies that act as an accelerator for the green economy.” On the other hand, adding “more and more friction on the trade side” will lead to duplication of supply chains and likely slower adoption of key low-carbon technologies, he said.