Green Economy Reaches Landmark

Shanny Basar

Mark Makepeace, chief executive of FTSE Russell, said the green economy has reached 6% of the global listed equity market, the same as the oil and gas sector and also emerging markets.

Makepeace spoke at a forum at the London Stock Exchange Group, the index provider’s owner, on the role of investor stewardship and the requirements for a transition to a sustainable economy.

“We have reached a significant point in time where the position of fossil fuels is changing,” he said. “They have decreased from 12% to 6% of global equity markets.”

FTSE Russell developed a model in 2016, which includes approximately 3,000 global listed  companies, to measure the green economy by calculating the revenues they make from products and services in renewable and alternative energy, energy efficiency, water and water and pollution. They are analysed based on their impact on climate change mitigation and adaptation, water, resource use, pollution and agricultural efficiency. The number of companies has risen by approximately one fifth since 2009 and covers nearly one third of global listed market capitalisation.

Makepeace said the green economy has grown to 6% from 5% five years ago. This equals the market capitalisation of the green economy doubling from $2 trillion to $4 trillion over that time period.

“We expect the growth to increase in pace and that allocations from institutional investors will reach the same size as those to fossil fuels or emerging markets,” he added. “If it continues at its current trajectory, it could represent 7% of global market capitalisation by 2030.”

FTSE Russell said that if green investment accelerates to $90 trillion then it could reach 10% of global market capitalisation, similar in size to global healthcare.

Today FTSE Russell also launched STEP Change, its Stewardship, Transition and Engagement Program initiative, which aims to help drive better global standards in sustainable investment. Makepeace said that by building ESG into core indexes and benchmarks, investors can drive stewardship and catalyse market wide improvements.

Rebecca Henderson, professor at Harvard Business School, said on a panel at the forum that there are two drivers of change in sustainable investment.

“ESG does drive sustainable performance for some firms and some sectors over long time periods,” she added. “It can also drive alpha and hard-boiled asset managers are beginning to think this is the route to superior returns.”

Henderson continued that universal investors who own the whole market are increasingly concerned with stability of whole system.

Hiromichi Mizuno, chief investment officer of GPIF, Japan’s $1.4 trillion pension fund, said on the panel that the timeframe for ESG investments is between 10 and 20 years so compelling research on returns will take time.

“Our return is dictated by diversification so we are vulnerable to systematic risk,” he added.

Jack Ehnes, chief executive of CalSTRS and chairman of the FTSE environmental markets committee, said on the panel that the Californian pension giant is working hard on ensuring companies produce consistent ESG data. He continued that in a month the US accounting standards body will release guidance on material risk factors, which he hopes will include ESG.

Ehnes added: “Climate Action 100+ is the largest global collaborative effort by institutional investors to take action on climate change. We realised that our activism could be more successful with a broader coalition.”

In one high-profile success last year, shareholders forced Exxon Mobil to report on the risks the oil giant faces from climate change despite opposition from management.

Last month Climate Action 100+ said 280 investors with nearly $30 trillion is assets under management have signed up to the initiative to drive corporate action on climate change.

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