The US green economy: a bipartisan growth story

25th November 2020 by Emma Goring

Investors and analysts are struggling to understand what the US climate, energy and environmental policy landscape will look like over the next four years.

In the wake of the US presidential election, and as the composition of the US Senate remains in the balance, investors and analysts are struggling to understand what the US climate, energy and environmental policy landscape will look like over the next four years.

The President-elect has made clear that the US will rejoin the Paris Agreement on Climate Change, but unfortunately, we don’t have a crystal ball on other announcements. But we can look back over the recent past at the evolution of the US green economy to try to draw some conclusions about the sector’s prospects—despite uncertainties around the direction and detail of federal policy.

The green economy in the US has grown strongly over recent years, despite changes in domestic policy and regulation. It is outpacing more carbon-intensive sectors in terms of both size and performance. US markets have continued to advance on sustainability despite differences in the US approach to policy on climate, energy and the environment.

Understanding the green economy is important for institutional and retail investors, who are allocating capital in ever-growing volumes to ESG and sustainable investment funds. According to Morningstar, interest in US sustainable index funds is exploding: such funds have attracted $36.1 billion in net inflows over the past decade, of which 82% was invested in the 18 months to June 2020.1

These investors must understand how US companies are able to respond to the global transition to a low-carbon economy. Policy and regulation can assist investors when it comes to understanding and assessing the green economy.  It is too soon to know how US policy will advance, and whether policies that support the transition will be driven by executive actions or whether legislation can be achieved with bipartisan support. A combination of legislative reform, agency, or executive action could provide considerable support for the green economy.

To anticipate the future of the green economy, we need to understand where it is today. To do so, we have developed the FTSE Russell Green Revenues Classification System (GRCS). It analyzes more than 16,000 companies globally to calculate the proportion of their revenues they earn from 10 green sectors, broken down in 133 micro-sectors. This classification system builds on earlier versions that we have used to track leading companies in the green economy for indexes since 2008.

Globally, we estimate that around 3,000 companies have some exposure to the green economy. The share of revenues they earn from green goods and services represents a market capitalization of around $4 trillion, or some 6% of the global economy. The global green economy is therefore materially larger than the global oil & gas supersector stocks in our ICB classification which represented about 3% of global equity market cap as of end of Sept (although it is worth noting that fluctuations in oil prices have since impacted that figure).

The sector is growing strongly: between 2009 and 2018 it grew at an annualized rate of 8%, far outstripping the rise in overall global GDP, which rose at an annualized 2.6%.

That story is also playing out in the US. FTSE’s Environmental Opportunities USA index, which tracks 125 US companies with significant exposure to the sector, has substantially pulled away from the benchmark FTSE USA All Cap. Its performance has been in stark contrast to that of the oil and gas sector, which has heavily underperformed in recent years, and especially in 2020.

As might be expected, given it has the world’s largest economy, the US accounts for the largest single proportion of the global green economy. But what might be more surprising is that the US share of the green economy stands at 37%, considerably greater than its share of global GDP, which stands at around 24%.

The clear picture that emerges from the data is that of a US green economy that is flourishing despite recent limited policy interventions in the US. The market has advanced in response to growing institutional investor and increasing consumer appetite for sustainable companies to invest in and products and services. Add to this the increasing cost-competitiveness of clean technologies, as well as action and policy support at the US state level, and green economy opportunities that US companies are seizing in other parts of the world and the possibilities for growth are considerable

Certainly, the prospects for the growth of US green economy companies would be boosted if the US forges ahead with substantial legislative and regulatory progress in the space. While there are still some uncertainties surrounding how the US policy landscape will evolve, it is likely the sector will continue its record of strong growth.