Green firms operating in the energy industry have higher profitability on average than those without green products or services, with the sector able to provide a framework for hard to decarbonise industries.
This is according to new research from the LSE’s Grantham Research Institute on Climate Change and the Environment. Whilst in general firms that diversify into the green market have higher profit margins, they do not have higher profitability when measured using rate of return, it found.
Firms producing green goods and services often also have lower asset turnover than those not in the green space, which the research institute suggested may be reflective of higher investment costs and more recent capital investments.
This is a different case altogether when looking at the energy industry, however. The research institute found evidence that firms in the sector with higher green revenues have higher profitability on average, which it said was also associated with higher stock market performance.
This evidence from the energy sector is, it said, consistent with environmental policies playing an important role in supporting companies through decarbonisation.
A strong carbon price signal and sector-specific policy packages are therefore likely to play a “significant” role in driving low-carbon technologies in emissions-intensive sectors, with the report citing transport and materials such as steel. These packages would correct market perceptions and create “robust investment frameworks”.
As a result, the government should take learnings from the energy sector and implement the aforementioned policy packages with the aim of decarbonising key, emissions-intensive sectors. This, the research institute said, would help to drive shifts in technologies and investments towards carbon neutrality.
The government should also support financing costs for green investments and encouraging investment in new technologies along the supply chain to ensure decarbonisation is economically viable, it continued.
Lastly, policies should be put in place to help create clearly distinguished green goods and production processes, for example through labeling, mandatory disclosure of green and carbon-intensive activities or green public procurement.
The report calculated its findings using newly constructed global firm level data, which estimates green revenue as a proportion of total revenue and matches key firm characteristics and firm financial performance variables to the green revenue data.
This data was from FTSE Russell and included information on over 16,500 global publicly listed firms across 48 countries operating from 2009 to 2016.
“Overall, our findings imply potential shortcomings in the current policy and investment landscape for low-carbon technologies. Urgent action is needed to mobilise the large-scale investments in green products, production technologies and services necessary to meet mid-century net zero carbon goals,” the report states.
It is one of many in recent weeks to touch upon a green recovery, adding that linking economic recovery efforts to low-carbon policy is “both a challenge and an opening to ‘build back better’”.
Earlier today, an open letter was sent to the British Prime Minister by 57 charities calling for a green recovery to help “forge a brighter and more resilient future”.