Inside the green economy: what it is and why it matters

The green economy generated over US$5 trillion in annual revenues for the first time last year, making up nearly 9% of listed market capitalisation. It represents a significant growth opportunity and an increasing number of companies and investors are keen to understand its parameters and its potential.

The green economy is composed of companies that provide products and services with environmental benefits. These include climate and environmental solutions such as renewable energy generation, energy-efficient buildings, electric vehicle (EV) manufacturing, clean water infrastructure, waste management and pollution control.

Spanning a wide range of industries, the green economy is large, diverse and expanding rapidly. It is playing an increasingly important role in the global economy as communities seek to address environmental challenges. However, it is also volatile, influenced by both the cyclical nature of the capital goods sectors and shifts in government policy.

To tap into the green economy’s growth potential, it is important for investors and companies to understand its unique characteristics.

Since the turn of the century, the green economy has expanded from US$1.3 trillion to almost US$8 trillion of market capitalisation. If considered a standalone sector, it would be the fourth largest by market capitalisation. It has delivered a compound annual growth rate (CAGR) of 15% over the past decade – second only to the growth of the Technology sector (see Figures 1 and 2).

Revenues generated by the green economy exceeded US$5 trillion for the first time last year, growing at a five-year CAGR of 9% – four percentage points higher than the broader market.

Looking ahead, the growth potential of the green economy remains strong. According to LSEG research, addressing the effects of climate change will require a cumulative investment of between US$109 trillion to US$275 trillion by 2050. These investments may benefit a broad range of companies and value chains in the green economy and support their further expansion.

The green economy is driven by products and services across various value chains. LSEG’s Green Revenues Classification System (GRCS) classifies green business activities into 133 micro sectors across 10 broader sectors.

Analysis of the green economy shows that much of its growth has been delivered by the Energy Management and Efficiency sector. This includes green buildings, cloud computing and efficient power electronics – together making up almost half of the green economy by market capitalisation. There is growing demand for solutions in this category, to help manage burgeoning energy demand from the rapid growth of artificial intelligence (AI) and the intensifying physical climate risks – for example through the growing use of cooling technology in response to heatwaves.^[1]

Transport Equipment, covering EVs, batteries and railways manufacturing, is the second largest green sector, accounting for 17% of green economy market capitalisation; with a CAGR of 20% since 2016, it stands out as fastest-growing part of the green economy.

Green activities can be found across nearly every sector within the traditional Industry Classification Benchmark (ICB) system. However, they are heavily concentrated in four industries – Technology, Industrial Goods and Services, Automobiles and Parts, and Utilities – which together account for 73% of the green economy’s market capitalisation (see Figure 4).

Importantly, a large contribution to the green economy by size does not always indicate a high level of green exposure within that industry. For example, while the Technology sector has a market capitalisation of US$22 trillion, only 11% of it is linked to green economy activities (Figure 5).

Other sectors have seen significant increases in their green economy exposure. For example, green economy exposure in the Autos sector has risen from 19% in 2019 to 53% at the start of 2025, reflecting the growing adoption of EVs, battery manufacturers and charging infrastructure. Similarly, the Real Estate sector’s green economy exposure has grown from 14% to 23% over the same period, reflecting rising demand for sustainable and energy-efficient building solutions.

Meanwhile, the green economy is geographically diversified, spreading across 50 countries. The US makes up around 60% of green economy market capitalisation – in line with the contribution of the country’s wider stock market to global listed equities (Figure 6). On the other hand, the green economy exposure within the US is relatively low – just 8% of its market capitalisation – compared to the global average of 9% and higher levels in other markets such as Taiwan (32%), Germany (13%) and France (12%) (Figure 7).

However, while the Americas make up the bulk of the green economy by market cap, this is not the case for green revenues, where Asia is the largest contributor. It generates 44% of global green revenues, compared with 31% from the Americas (Figure 8).

Green industries have demonstrated strong long-term performance. Since 2008, the FTSE Environmental Opportunities All Share Index (EOAS) – a global basket of over 1,000 stocks with at least 20% exposure to the green economy – has outperformed its benchmark, the FTSE Global All Cap, by 59%.

However, its short-term performance can be volatile. Over 12-month periods, the FTSE EOAS has shown large swings – outperforming the benchmark by 31% in early 2021 but underperforming by 12% in mid-2012 (see Figure 9). 

A breakdown by sector shows that Energy Efficiency has been the primary driver of the green economy’s long-term outperformance, whereas Renewable Energy has remained a laggard. A Brinson attribution analysis by ICB sector over a five-year period shows that the Consumer Discretionary and Industrials sectors have made positive contribution to the green economy’s performance, while Utilities and Energy have had a negative impact on returns.

Overall, the green economy has outperformed in 54% of all 12-month periods and 70% of all five-year periods since 2008 (Figure 10), underscoring its long-term resilience.    

A breakdown by sector shows that Energy Efficiency has been the primary driver of the green economy’s long-term outperformance, whereas Renewable Energy has remained a laggard. A Brinson attribution analysis by ICB sector over a five-year period shows that the Consumer Discretionary and Industrials sectors have made positive contribution to the green economy’s performance, while Utilities and Energy have had a negative impact on returns

Overall, the green economy has outperformed in 54% of all 12-month periods and 70% of all five-year periods since 2008 (Figure 10), underscoring its long-term resilience.    

For investors seeking less volatile exposure to the green economy, integrating exposure to climate solutions and the green economy in a broader, more holistic sustainable investment approach can help reduce volatility and tracking error from the benchmark.

For example, indexes such as the FTSE TPI Climate Transition Index Series and the EU Climate Benchmarks Index series both use green revenues alongside other factors, such as carbon emissions and TPI management quality. These indexes tend to track their parent benchmarks more closely than pure green economy indexes – but they also capture less of the green economy’s outperformance potential (see Figure 11). 

An assessment of the green economy’s performance over recent years shows a developed sector that is delivering steady revenue and earnings growth. Increasingly, green economy companies are offering products and services that combine reduced environmental impact with improved performance and economics.

For investors, the green economy presents a diverse set of opportunities, with strategies and investment products available to suit a wide range of risk appetites.

For more insights, download our ‘Investing in the green economy 2025’ report, which uses our Green Revenues data, to explore the characteristics and performance of the green economy in greater detail.

[1] IEA (2025) - Global Energy Review 2025