The market for environmental and climate solutions, or “Green Economy” has grown substantially faster than the broader market, both in terms of revenue and valuation, and if treated as a standalone sector, has outperformed all other industries except for the technology sector over the past ten years, according to a new study released by the London Stock Exchange Group (LSEG).

For the study, LSEG’s fifth annual “Investing in the Green Economy Report,” LSEG used its proprietary data, analytics and index solutions to measure company exposure to the green economy, assessing more than 19,000 companies globally, and green revenue data categorized across 133 green products and services based on the FTSE Russell Green Revenue Classification  System.

According to the study, the value of the green economy has grown at a significantly higher rate than the broader market, with market cap increasing at a 13.8% compound annual growth rate (CAGR) over the past ten years, compared with an 8.3% CAGR for the global equity markets. If viewed as a standalone sector, the green economy would be the fourth largest sector, with a market cap greater than $7 trillion.

Green economy revenues have also substantially outperformed, growing by a 7.6% CAGR over the past 10 years, compared with 5.3% for the broader market, according to the report.

While the green economy has outperformed over the long-run, the study also highlighted the volatility in its performance since 2020, driven by a combination of factors including supply chain disruptions, cost inflation, higher interest rates, geopolitical fragmentation and green protectionism. Following rapid market growth in 2020 and 2021, the green economy market cap dropped significantly in 2022. The market recovered and outperformed in 2023, and now accounts for 8.6% of global market cap, slightly below its record share of market cap achieved in 2021.

Breaking down the performance, the report found that Energy Management and Efficiency has been the best-performing area of the green economy, growing at a 17% CAGR over the past five years, driven by the cost-effectiveness of energy efficiency solutions, while Renewable and Alternative Energy, described by LSEG as “the most visible area of the green economy and an area of focus for many green thematic investing products,” has underperformed recently, despite strong renewable energy installations, due to pressure on profitability.

One of the key potential future drivers of green economy performance highlighted by the report is the growth of digital technologies, and particularly artificial intelligence (AI) and data centers, given the efforts of giant tech companies to address their environmental footprint. While data center electricity use jumped nearly 5x between 2005 – 2022, it is expected to nearly double again by 2026. To address the emissions impact of this growing energy use, the report highlighted the recent actions of several large technology companies, noting that Amazon has become the largest renewable energy buyer, followed by Meta, Microsoft and Google. Beyond expanding renewable energy purchases, the report noted that tech companies are also investing in early-stage low-carbon energy and storage solutions such as nuclear fusion and hydrogen.

The report also examined the “green exposure” of various sectors, measured by green revenue-weighted market capitalization, finding that around one third of industries have greater than 10% exposure. By sector, the Automobiles and Parts sector has the highest green penetration rate at 42%, driven by EV and battery manufacturing, followed by the utilities sector at 33%, with significant exposure to increased adoption of renewable energy. Other sectors with significant green exposure include Construction and Materials (23%), Chemicals (14%), Industrial Goods and Services (14%), Technology (11%), Real Estate (10%) and Basic Resources (10%).

Click here to access the report.