Paul: [00:00:00] Welcome to Index Ideas from FTSE Russell. I'm Paul Amery, your podcast host. In the podcast we explore index ideas that can help you address real world investment themes and challenges.
The concepts that we discuss in the podcast are not investment advice. They represent transparent, systematic approaches that may be developed into indices and made available for broad public use.
So any reference to potential strategies is intended for informational and educational purposes only.
In this episode, I'm joined by Lee Clements, who is Director of Applied Sustainable Investment Research at FTSE Russell. Lee recently co-authored a research paper called “Investing in the Green Economy”. You can find a link to it in the show notes and on the FTSE Russell website. Lee is here to discuss the paper's main conclusions. Lee, welcome to Index Ideas.
Lee: [00:00:48] Thanks very much, Paul.
Paul: [00:00:50] Let me start with a question of definitions. What is the green economy?
Lee: [00:00:53] Well, put simply, the green economy is green products and services. It's products that are providing a solution to environmental challenges, be it renewable energy, be it high-efficiency semiconductors to reduce the amount of energy use or be it recycling services. It's really about the opportunity side: things that can have an impact, rather than the risk side of climate investment.
Paul: [00:01:23] So why is the green economy interesting to investors?
Lee: [00:01:25] Well, essentially it's because, firstly, it's actually pretty big. We estimate that it's just under $8 trillion in market cap. It's growing: over the last ten years it's averaged about 15% growth per year. And it's showing strong investment returns. It's been a great place for investors to be, but it's also quite opaque in terms of its definition and hence can be difficult for investors to access it.
Paul: [00:01:56] So, how do we at FTSE Russell measure the green economy? What tools do we have for doing that?
Lee: [00:02:01] Well, the key tool is a set of data developed at FTSE and run by LSEG called green revenues. And that's essentially what it says on the can. It's the revenues from these green products and services. We go in and try to measure the percentage of a company's real dollar revenues (or euro revenues or whatever it might be) from that range of green products and services, which are defined in a taxonomy of 133 different activities. And from that point of view, it's measuring the real economy impact that those green products and services will have to that company.
Paul: [00:02:39] So how much consensus is there on measuring the green economy amongst different data and index providers? There are obviously lots of different firms out there doing the same thing.
Lee: [00:02:48] Well, that has evolved over history. This has been done for quite a long time. And around 2018, the regulator started getting involved with taxonomies around green products and services. However, there are quite a lot of different taxonomies: if you look around the world, China, Singapore, the EU is probably the largest and most followed ones. They all have their differences at the regulatory level. And then the way in which companies report this, the interpretation across value chains. At what point do you start? What point do you stop? Means that there is a core consensus, but there's still quite a lot of room for interpretation, particularly when you're looking at different regions and countries.
Paul: [00:03:36] So you mentioned that in the green revenues data model, we measure more than 100 different types of activity. How does the model cope with the emergence of new green economy activities? Or maybe the disappearance or move to lower importance of existing ones?
Lee: [00:03:52] Well, it's a flexible definition, and it has changed over time. The last major change was around 2020. But essentially, what it tries to do is to start off by looking as broadly as possible. There are some kind of sets of data which look at what I would call the low-hanging fruit, the very obvious stuff, the stuff that you would see a photo of on the front of the FT when they talk about the green economy: a solar panel, electric vehicle and so on. We've tried to look at it more broadly, where we are looking at those things, but also looking at energy efficiency. We're looking at recycling, we're looking at clean water, we're looking at pollution. We're looking at it from a mitigation point of view. We're looking at it from an adaptation point of view. So the breadth of capture is very important as a starting point. But then also we have an independent governance committee which looks across our sustainable data. And we're always looking at that data as it's being collected to look for changes, to see how things are evolving.
Paul: [00:04:50] I wanted to ask you about that oversight and review process, and how does that work in practice? Who looks after the overall structure of the data model and any indices that we build using the data?
Lee: [00:05:03] Well, the data is run by LSEG. LSEG, Data and Analytics. They collect the data, they analyse it. There's an SI research team. One of my co-authors on the Green Economy report each year, Lily Dai, who is a real expert in this subject, is always looking at that on the index side of things, that's run by FTSE Russell and the team there, using that data and working in collaboration. And then we have a committee, a sustainable investment committee, which has evolved over the years, which looks at it and has kind of independent experts from across the sustainable investment community.
Paul: [00:05:41] So there are people from both within and outside the firm involved in the oversight.
Lee: [00:05:45] Yes.
Paul: [00:05:47] And turning to the applications of the data and the investment applications, which indices or families of indices do we currently produce based on the green revenues model?
Lee: [00:05:58] Well, data-wise we've got a number that are produced on it because, as I said, this is the opportunity side of climate investing as opposed to the risk side, which should be looking at companies that are producing a lot of carbon or are involved in fossil fuels. So the actual green revenues data goes into quite a lot of our climate indices. So our TPI transition indices, our Paris-aligned benchmark indices and a range of other climate indices. In terms of where it goes in as the sole focus, essentially, that would be our environmental markets indices. The other ones are measuring kind of overall climate risk. They're capturing the whole of the equity market. The environmental markets indices are looking specifically at those companies that are highly involved in producing those green products and services there. So that's really trying to capture a measure and give a direct way for clients to invest in the green economy.
Paul: [00:06:59] And typically, do we set a threshold for the share of a company's revenues that we classify as green for those companies to enter a particular index, is that how the model is normally applied?
Lee: [00:07:12] Yes. That's a very good question. There's a number of different ways that we cut this. And environmental markets is really a family there. So probably the key broadest index is the environmental opportunities index. And they have a threshold of 20%. So you have to have over 20% of your revenues coming from green products and services to get in there. However, that shouldn't be interpreted as, oh, a very low threshold, because actually, for the overall index, roughly 50% is the average there, because obviously it's companies over 20%, that's a minimum. And if you look at it because there's a whole range of companies from, you know, the green revenues can capture, if it's half a percent of your revenues up to 100%, using that 20% threshold, we estimate that around three quarters of the total market of the green economy is captured within there, so 20% actually is quite a good capture of the market there. We also have the environmental technologies indices, which have a 50% threshold. So a higher threshold.
Paul: [00:08:17] Thanks for explaining that. What about the performance of global green economy stocks? I know investment performance is not the primary objective, but is it possible to comment on how those categories of stocks have performed, both globally and in individual types of green economy activity?
Lee: [00:08:34] Sure. And that's been a key thing because obviously this is a highly evolving, quite a disruptive segment of the market, and also one where there's a lot of different things happening, particularly at the moment with, you know, how is the transition happening, what are the geopolitical sides of things and the debate about, you know, does sustainable investment enhance or reduce performance? And one of the things I'm quite pleased to say is that over time, we've seen that the green economy, or more particularly here, I'm using the Environmental Opportunities All-share index, which is our broadest global index to capture the green economy, has performed extremely well since its launch in 2008. It's 85% ahead of the broader market, which would be the FTSE Global All-Cap. That number is up to the middle of 2025. And it's consistently performed well. There have been some periods where it's underperformed, and there's been one period where it performed extremely well, which was in the 2020-2021 period. But consistently it's done well. 2022, it had a bit of a wobble there. It underperformed the market by about 6% or 7%, but it actually made that back within the first six months of 2023. And so far this year, despite all the volatility in the market, it was 2.9% ahead of the market as of the end of last week. So the performance, whilst a bit more volatile than the broader market, has been consistently positive.
Paul: [00:10:05] And we're recording this on the 13th of November, for anybody who wants to check the figures. One thought I had when preparing for the podcast was because obviously technology is generally regarded as a fairly green sector. If you buy a green economy stock portfolio, do you end up with the same seven large US tech stocks that you get in a cap-weighted index. Or is there a difference?
Lee: [00:10:29] I mean, you do have tech stocks in there, but it's not just capturing the Mag Seven or riding the AI bubble, which is probably even more important than the Mag Seven right now. There are some large technology companies in there. Tesla is an obvious one for obvious reasons, because electric vehicles, we have some others in there, like Microsoft, because of the way that we measure the efficiency that it's been able to create through its cloud computing and some other elements of its business. But by no means do we capture all of that Mag Seven. There's quite a number of them, such as Nvidia, that aren't in there. And actually, if you look overall, whilst there is an overweight in technology, it's a relatively small overweight to technology. The much bigger overweights for the environmental opportunities all share are actually in industrials, the companies producing the goods and services that will generate the energy, which will make processes more efficient, which will recycle the metal and the paper or whatever, and the utilities which are generating the green power or are kind of processing the water and cleaning it up.
Paul: [00:11:39] And thank you very much for explaining that. And finally, how are the investors that you talk to currently using FTSE Russell's Green Economy data and our indices?
Lee: [00:11:49] Well, I think more broadly, some of the green thematic investors have been a little bit gun-shy in recent years because, as I said, the sector did very, very well in 2020, 2021 and it did get hit, including the environmental opportunities, but even more so with some other indices. It did get hit in 2022. Now it's recovered quite strongly in 2023, 2024 and 2025. But they have memories of that impact in 2022. And also some of the other products which investors are often in have been in those low-hanging fruit that I talked about earlier, the renewable energy, the electric vehicles, which have been far more impacted because they're very related to government subsidies. They've seen significant overcapacity in the markets, which have plunged the profitability. They got hit a lot harder. The Environmental Opportunities Index has done a lot better because, a, it's far more diverse than that low hanging fruit. And in particular, the thing that's really powered it has been the energy efficiency sector, where there are positive economic reasons for applying those solutions. So that's powered it through the more difficult markets. I would say the way investors are coming back to it now is really two reasons. One would be the sustainability reason. Fundamentally, they want to try and have a positive impact, and these companies are making products and services that will have a positive impact. So those two things are equated to each other. And the second reason, which they're increasingly seeing from the performance, particularly of something like environmental opportunities, is looking at the investment impact, the fact that it's diverse and it's done very well through a diverse range of the economic cycle, that they're looking at those things.
Paul: [00:13:42] Thank you. Lee, that's a very interesting overview and thanks for taking the time to join me. That's it for this episode. If you've enjoyed this episode of Index Ideas, then please do follow us and give us a positive rating or review on your podcast app of choice. And if you'd like to get in touch with the show, you can do that via the email address
[email protected]. But for now from me, Paul Amery. Goodbye.
