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Climate change: at least now the economics are settled

By: Kevin Bourne, Managing Director at FTSE Russell

While the debate will likely continue on whether or not the science of climate change is “settled,” we can now say definitively that at least the economics are. For the first time, it’s possible to accurately identify and measure all sources of green revenues from 13,400 public companies which represent 98.5% of the total global market capitalization.

Perhaps the most fascinating result of our new FTSE Russell Green Revenues (LCE) data model is that, when you view “green revenues” globally, it becomes clear that global business is undergoing a new industrial revolution at this very moment.

Corporations across the globe are changing their business models. Investors and consumers are speaking with their dollars, and that is forcing a transformation toward green goods, products and services which we are able to track.

climate_change_chart1Source: FTSE Russell, data as of July 10, 2016.

The data model shows this transformation. Here’s just a sampling:

  • More than 2,400 public companies in FTSE Russell Green Revenues (LCE) data model already generate green revenues from one or more of the 60 green subsectors.
  • The model shows large cap companies increasingly involved in the delivery of green goods, products and services.
  • Analysis of the FTSE Global Equity Index Series (FTSE GEIS) shows that nearly 7.2% ($2.9 trillion) of the index value is derived from green revenues, compared to 8.3% ($3.5 trillion) total revenue from Emerging Markets.
  • Of the 7,711 companies in FTSE GEIS, more than 1,880, or 24%, already have some exposure to green revenues, increasing steadily over the last seven years. 

Our model is unique in that it allows us to take a bottom up approach. Existing sustainability models track operating procedures through ESG scores exclude fossil fuel owners or tilt against heavy CO2 emitters in portfolios. FTSE Russell’s Green Revenues framework, based on the LCE data model, tracks revenues from goods, products and services that help the world to adapt to, mitigate or remediate the impact of climate change, resource depletion or environmental erosion.

Markets can now measure and model an industrial transition as it happens

By incorporating this measure of green revenue exposure, FTSE Russell’s framework provides the first complete picture of the scale and velocity of the structural shift to a green economy across public companies. The model provides portfolio managers, research analysts, product managers and market participants with consistent, transparent data to track green revenue exposure and support their investment in companies that are engaged in the increasing shift in the global economy.

And for the first time, we are able track this industrial transition as it happens.

As the world increasingly realizes the negative impact of the current industrial model, the impetus for change accelerates. The risks created by the incumbent economic system such as climate change, resource depletion and environmental erosion are of growing concern.

As a result of these risks, change to corporate behavior is occurring as companies increasingly understand the need to control and moderate the negative aspects of their operational models while also understanding how they could participate in the opportunities presented by the green economy. This delivery of green goods, products and services focuses on changing our way of life in response to the new macro risks of climate change, resource depletion and environmental erosion that we are increasingly able to quantify.

This transformation therefore has significant implications for how asset owners, investment managers and investors evaluate risk, develop economic projections and invest to meet green guidelines either established by their internal requirements or coming regulation, such as France’s implementation of article 173, which could be adapted for use across the EU and other countries in the coming months. We live in an exciting and rapidly changing world and the FTSE Russell Green Revenue (LCE) data model will help investment professionals understand and measure this new world in real time.




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