Returns in $9.7T green stocks second only to tech, says LSEG

If the companies that derive revenue from products and services that help reduce carbon emissions were taken as a single industry group, they would have had the second-best financial performance of any equity sector over the past decade.

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

While the $100 trillion-plus price tag for transitioning the world economy away from fossil fuels to low-carbon energy sources will create substantial opportunities for investment, financiers have made clear private capital will only be deployed if the returns make sense.  And though the AI-fueled tech boom is currently the center of investors’ attention, over the long term the green transition is a “mega force” to be reckoned with, LSEG said.

“This is a one-of-a-kind investment opportunity,” Jaakko Kooroshy, global head of sustainable investment research at LSEG, said in an interview. That’s both in terms of “size and performance,” he said.

LSEG defines the “green economy” by assessing the revenue exposure to green business activities of over 19,000 companies globally. The research shows more than 4,000 of them generate revenues from green products and services, including everything from renewable power generation to the mining or processing of critical minerals needed for batteries and the development of recyclable materials.

Using this definition, the green economy now boasts 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 global listed equity markets as of April.

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

The biggest contributor to the green sector’s outperformance is energy management and efficiency, with a 17% compound annual growth rate over the last five years. Efficient information-technology equipment and electronics has now overtaken green building supplies as one of the top drivers of growth, according to Lily Dai, senior research lead in LSEG’s sustainable investment research team.

In fact, the explosive growth of AI and data centers may become a new driver for green-economy expansion. Not only are more energy-efficient chips, servers and cooling systems required to fuel AI’s onward march, but Big Tech also is increasingly concerned with the environmental impact of the technology and looking to source more clean energy, LSEG said.

While there are reasons to be optimistic about corporate revenue growth from green activities, LSEG also noted several “headwinds” that may dampen the outlook. The most prominent of these being overcapacity in sectors such as solar and trade barriers related to renewable-energy equipment and electric-vehicle manufacturing, where the US and European Union have raised tariffs on EVs from China. 

“Protectionism is a double-edged sword for the green economy,” Kooroshy said. On the one hand, US President Joe Biden’s Inflation Reduction Act has “unleashed massive amounts of demand and subsidies, which act as an accelerant 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 a slower deployment of critical low-carbon technologies, he said.