Sustainable economic sector reaches a value of $7.9 trillion, with an increasing proportion dedicated to climate change adaptation efforts
**Green Economy Defies Fund Outflows, Adaptation Finance Gains Prominence**
In a surprising turn of events, the green economy has continued to grow despite significant outflows from green funds in the first quarter of 2025. According to LSEG analysts, long-term structural drivers remain supportive of the green sector.
The FTSE Environmental Opportunities All Share Index, which represents the green economy, underperformed its benchmark, the FTSE Global All Cap Index, at the start of the year but recovered in the second half and ended the year in line with the broader market.
As of the first quarter of 2025, the green economy represents $7.9 trillion or 8.6% of stocks traded worldwide. However, so far this year, green stocks have underperformed by 3%.
The expansion of the green economy is not solely reliant on green fund flows. It is increasingly driven by private capital, corporate investment, and public policy, even as retail and institutional green funds experience outflows.
The global climate finance landscape is broadening, with private climate finance surpassing $1 trillion for the first time in 2023, outpacing public investment. Green growth is increasingly driven by cleantech innovation, renewable energy, energy-efficient buildings, smart grids, and green chemistry, which are becoming major contributors to GDP in leading economies.
Climate adaptation is gaining prominence in the green bond market, but significant financing gaps remain, particularly in emerging economies where the need is greatest. The need for adaptation is especially acute in Africa and other emerging markets, where climate risks are escalating but traditional finance remains constrained.
Despite the overall growth in climate finance, emerging and developing economies still face barriers to accessing affordable capital for adaptation. There is a persistent gap between the scale of need and available finance, with calls for more catalytic capital to unlock larger flows.
The landscape is evolving toward more systemic, policy-driven, and diversified investment models that go beyond traditional green funds, enabling continued growth in the green economy despite short-term volatility in specific investment vehicles.
In the real estate, utilities, and basic materials sectors, more than half of all listed firms are citing adaptation measures in their corporate disclosures. Fixed income assets may offer a route into the trend of climate adaptation.
LSEG's analysis of over 12,000 green bonds shows the focus on resilience in the green bond market. Over 25 percent of eligible use-of-proceeds categories in green bonds relate to adaptation and resilience investments. It is expected that global green bond issuance will be slightly lower in 2025, following a record $572bn last year.
Performance in the green economy has varied significantly between sectors, with the renewable energy sector facing headwinds and the energy efficiency sector proving to be more resilient. The renewable energy sector has faced challenges such as sensitivity to interest rates and inconsistent levels of government support.
Adaptation finance flows have grown at a compound annual growth rate of 21%, indicating a growing recognition of the need for climate adaptation. It is expected that this trend will continue as the impacts of climate change become more apparent.
- The growth of the green economy is driven not only by green fund flows but also by private capital, corporate investment, and public policy, even as some green funds experience outflows.
- In the global climate finance landscape, private climate finance surpassed $1 trillion in 2023, outpacing public investment, and the focus on resilience in the green bond market is increasing, with over a quarter of eligible use-of-proceeds categories in green bonds relating to adaptation and resilience investments.
- The renewable energy sector, which faces challenges such as sensitivity to interest rates and inconsistent levels of government support, is experiencing headwinds, while the energy efficiency sector is proving to be more resilient. In the real estate, utilities, and basic materials sectors, more than half of all listed firms are citing adaptation measures in their corporate disclosures, and fixed income assets may offer a route into the trend of climate adaptation.
