When investors think of ‘green’, often their first thought is renewable energy or clean technologies such as electric cars. But the green economy is much broader than that. It is comprised of companies and investment vehicles of all sizes, in all geographies, and a diverse range of sectors.

And yet, without a specific industrial classification, it can be challenging to identify an investible universe of ‘green’ equities, and for companies beyond pure play green sectors to demonstrate their green credentials to investors

The London Stock Exchange’s Green Economy Mark set out to change that. At its core, it is a way to identify companies and funds across London’s markets that are contributing to environmental objectives and generating more than half of their revenues from green products and services.

Since I took up my post as the Head of Sustainable Finance, Capital Markets, at LSEG, I have seen the Green Economy Mark and its cohort of companies and funds go from strength to strength. Increasingly, the Mark is recognised by investors, as well as companies that are considering floating in London. Existing Green Economy Mark companies and funds are also returning to the market and tapping into the deep pools of capital available from global sustainability-focused investors.

The value of the Green Economy Mark is contingent on having a clear, transparent, and robust methodology, which provides a true representation of the businesses that are having a material impact on meeting environmental goals. From the outset, the Green Economy Mark has used FTSE Russell’s Green Revenues Classification System (GRCS) - which contains 10 green sectors, 64 subsectors and 133 micro sectors - to assess companies’ exposure to environmental products and services.

FTSE Russell’s Green Revenues data model and classification system also provides a granular, robust and transparent solution to assess and report on EU Taxonomy alignment for individual companies. While not identical, the EU Taxonomy and the GRCS are broadly similar in structure and highly aligned on core activities, giving investors an effective tool to conveniently identify companies involved in the green economy and quantify the share of their revenues that are likely to be recognised under the EU Taxonomy.

Using the GRCS, companies are measured based on their impact on achieving seven environmental objectives:

•  Climate change mitigation
•  Climate change adaptation
•  Pollution prevention and control
•  Protection of healthy ecosystems
•  Sustainable use and protection of water and marine resources
•  Transition to a circular economy, waste prevention and recycling
•  Sustainable and efficient agriculture

In addition to these guiding environmental objectives, the GRCS includes a tiering system to identify the level of ‘greenness’, or net environmental impact. Only activities in Tier 1 (significant and clear environmental benefits) and Tier 2 (more limited but net positive environmental benefits) are considered as qualifying for the Green Economy Mark. We do not include Tier 3 micro sectors which covers activities which do have some environmental benefits but are overall net neutral or negative.

Since its launch, the GRCS has expanded its reach to provide more of the investment community with a broad view of green activity and its material impact on companies’ revenues. Given the potential scale of the green investment opportunity, there are clear benefits to establishing a common language to define the green economy. Financial markets have come to rely on this common classification to identify investment opportunities and measure their growth and performance. With growing concerns for corporate greenwashing, it is more important than ever when recognising green companies to do so with rigour and a robust framework.

In 2022, we standardised our methodology for both Main Market and AIM companies so that all issuers were assessed on the same basis, using the GRCS as the underlying taxonomy. Until now, automatic eligibility was given to AIM companies that were included in the FTSE Russell AIM Environmental Opportunities Index. This review of the inclusion criteria and rebalancing means that there is now a higher standard to be met before being recognised with the Mark.

This change has strengthened the Green Economy Mark in two ways. We are recognising that all companies, irrespective of size or industry, have a role to play in the just transition and should be assessed on the same basis. And we are increasing transparency to make it clear how we measure companies’ exposure to the green economy, using publicly available criteria, in a manner which is consistent for all publicly quoted companies.

The methodology is designed in a way that means it is not good enough to simply have good Environmental Social Governance (ESG) practices in place; companies must prove substantial – not just marginal – contributions to achieving core environmental objectives. In other words, they must be integral to building a greener economy, and for that to be apparent in their revenues.

I am proud to see our third annual Green Economy Mark report published today. Here you will find the companies that are on the front line of the green economy, who as a group are contributing in diverse ways: turning waste into energy, providing sustainable agricultural solutions, and greening the transport sector to name a few. In total, there are now 108 companies and funds that have the Green Economy Mark with a combined market capitalisation of £156bn.

However, the companies and funds making a material impact on the green economy remain a small proportion of the overall market. In time, as more investors respond to global burgeoning environmental challenges, more consumers seek sustainable alternatives, and more companies integrate the risks and opportunities posed by climate change; I hope to see many more companies in London join their ranks.

Claire Dorrian

Head of Sustainable Finance, Capital Markets, LSEG