Sarlota Lujza Hohwald
This insight explores how exposure to the green economy can diversify your investment portfolio. It delves into key sustainable investing considerations within the wealth management space, highlighting the evolving role of ESG data and the benefits of investing in the green economy. The insight examines:
- The evolving role of sustainable investing: Over the past decade, sustainable investing has gained traction, driven by global issues like decarbonisation. ESG data helps investors measure a company's ESG performance and align investments with corporate commitments and client preferences.
- Three key considerations for your portfolio: Investors may seek to gain exposure to the green economy for different reasons, particularly at a macro level. When it comes to their portfolio there are potential benefits on offer.
- Looking ahead: As they increasingly look to align their investment decisions with the sustainability requirements of their stakeholders, the green economy will continue to be factored in global investment decisions.
Sustainable investing is evolving
Over the past 10 years, investors have increasingly chosen to factor sustainable investing (SI) into their portfolios, building on public and political discourse on global issues, like decarbonisation. Alongside this trend, the role of ESG data is evolving. Data plays an important role in helping wealth investors and advisors measure a company’s relative ESG performance, commitment and effectiveness, so that they can choose the investments that most align with their corporate commitments and client preferences. ESG data offers the opportunity to invest in companies and sectors that play key roles in, for example, the energy transition. Companies and industries that have not yet fully decarbonised, but have laid out plans to do so, are also included in this category.
These investments also offer investors the opportunity to set decarbonisation targets for their portfolios, including those who do so to respond to their own corporate net zero or other related targets.
As sustainable investing becomes a key aspect in the wealth management space we explore three key considerations for your wealth portfolio.
Although a lack of knowledge is the number one barrier in the sustainable investing space, LSEG research shows that two thirds (66%) of financial services providers agree or somewhat agree that SI will grow significantly in the years ahead[1].
Three key considerations for your portfolio
Investors may seek to gain exposure to the green economy[2] for different reasons, particularly at a macro level. When it comes to their portfolio there are potential benefits on offer, and our top three follow.
Performance:
The global green economy presents a significant investment opportunity. Our research shows that, in terms of both growth and financial performance over the past decade, the green economy has returned a highly attractive performance, second only to the tech sector.
If the green economy, represented by the FTSE Russell Environmental Opportunities All Share Index (EOAS), were an ICB Industry in its own right, it would have been the second best-performing industry over the last 10 years, outmatched only by the performance of the tech sector.
The sector enjoyed a particularly favourable year in 2023[3], rising 32% against the 22% returned by the benchmark FTSE Global All Cap Index and indicating a marked recovery from a year of underperformance in 2022.
Diversified exposure:
The green economy provides diversified exposure that spans industries, value chains and markets[4]:
- When mapping the green economy against traditional industry categories, we can see that almost all industries generate green revenues – although the degree of exposure does vary.
- When mapping revenue according to the FTSE Russell Green Revenues Classification System, it is evident that green products and services span global value chains.
- The green economy spans more than 50 markets – both developed and emerging – offering cross-jurisdictional exposure.
- This multi-faceted nature of the green economy sector provides investors with a wide range of investment possibilities.
The changing role of tech companies:
The relationship between AI and the environment is evolving. According to The International Energy Agency, the energy consumed by data centres could double in the four-year period from 2022 to 2026. While emissions from data centres are rising to accommodate the needs of the AI revolution, tech companies play an important role in the process of decarbonisation. Tech firms are accelerating their efforts to address power consumption by channelling investment into climate-related technologies, and are focusing on developing more sustainable technologies to meet their rising electricity demand. These efforts can help redefine efficiencies relating to global energy consumption and can deliver further impetus to the green economy.
In addition to these key considerations of a portfolio with exposure to the green economy, a number of participants within the wealth community are pursuing investments that aim to achieve measurable sustainable outcomes.
As they increasingly look to align their investment decisions with the sustainability requirements of their stakeholders, the green economy will continue to be factored in global investment decisions.
[2] The global green economy, a market providing climate and environmental solutions, has expanded considerably over the last decade, representing a US$7.2 trillion investment opportunity as of 2024.
[3] As measured by the FTSE Environmental Opportunities All Share Index (EOAS) – powered by FTSE Russell Green Revenues data.
[4] Read more about the report here: https://www.lseg.com/content/dam/lseg/en_us/documents/sustainability/investing-in-green-economy.pdf
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