Green equity is gaining momentum and looks poised to accelerate capital flows towards the sustainable transition. But what is it, and why does it matter?
Green equity refers to listed companies that demonstrate a contribution to the green economy, according to the specific criteria set by different stock exchanges. The ‘green’ label is typically conferred based on an independent external review that the company meets the exchange’s requirements, similar to a second-party opinion (SPO) for a green or sustainable bond.
The first labelled green bond issued by the World Bank in 2008 was in response to demand from investors. Similarly, the first green equity designation established by Nasdaq provided a way to showcase green companies to investors.
Unlike green bonds, which finance specific sustainable projects with clearly defined use-of-proceeds, green equity recognises companies whose core business models are aligned with the green transition. Classifications typically require over 50% of revenues and investments to be ‘green’, reflecting a broad commitment to sustainability.
Currently, Nasdaq, Brazil’s B3 and the Swiss exchange SIX offer green-equity designations based on green-equity principles. In addition, the London Stock Exchange provides the Green Economy Mark, based on a data-driven way to identify green companies.
These designations are not just labels; they are tools to help investors identify companies aligned with long-term climate objectives. Requirements for companies vary across the exchanges, but in many cases include:
- The majority of revenue is green, with restrictions on fossil fuel-based revenue
- The majority of investments are green
- Transparency requirements related to taxonomy alignment or other KPIs
- Annual confirmation that a company still meets the requirements
The evolution of labelled bonds and green equity
It took several years from the first labelled green bond issuance in 2008 until the International Capital Market Association (ICMA built consensus across market actors through the establishment of the Green Bond Principles in 2014. While the green bond market was essentially a European and multilateral institution market in the beginning, by 2016, issuance in emerging markets (especially in China) had started to take off.
In contrast, green equity has moved much faster. Just two years after Nasdaq’s launch of its green equity designations in 2021, the World Federation of Exchanges (WFE) published the Green Equity Principles in 2023. By 2024, there was significant movement in emerging markets, with B3 launching its green equity designation in Brazil and the Philippines publishing a draft green equity framework for consultation.
Voluntary principles for both green bonds and green equity provide a flexible yet robust guidance to the market. The pace of transition varies across jurisdictions, shaped by different starting points. The WFE Green Equity Principles offer an adaptable foundation for future refinement and allow for regional variations to reflect local markets. As the green equity market evolves, the WFE can continue to provide an important forum for exchanges to reflect upon and refine the Green Equity Principles going forward.
Trust will continue to be nurtured through external reviews that provide a third-party opinion on consistency with exchange requirements. From the first labelled green bond, investors asked for an independent review of the ‘green-ness’ of the use of proceeds. The model for Second Party Opinions was established by the former parent organisation of Shades of Green, CICERO Research Institute. This independent review model remains the gold standard in the sustainable bond market today. Likewise, approved independent reviewers evaluate a company’s credentials against the requirements of green-equity designations.
From principles into practice
With 12 listed companies globally that currently qualify, the number of green equity-labelled companies is small – but growing. These companies operate across a range of sectors, from water utilities such as SABESP, to real-estate companies such as Heba Fastighets and energy services such as Primrock. Several companies have also IPO-ed onto a green designation, for example, Solar Foods, a Finnish food-tech company.
As an approved reviewer for Nasdaq, B3 and SIX green equity designations, S&P Global Ratings provides independent assessments of consistency with exchange requirements.
Through S&P’s Climate Transition Assessment, we look beyond long-term net-zero targets to understand near-term transition actions and investments. In our analysis, we also apply the Shades of Green approach to a company’s revenues and investments.
Shades of Green provides a transparent view on the whole spectrum of transition across the economy, featuring six shades – from ‘red’ fossil-fuel related activities, to ‘dark green’ low carbon climate resilient activities.
This spectrum approach allows for different sector and regional starting points in the transition, while also highlighting business activities that are already aligned with a low-carbon, climate-resilient future.
Laying the groundwork for the future
Green equity is still in its early stages, but the signals are encouraging. It offers a scalable, transparent and credible approach to aligning corporate finance with climate objectives, particularly for companies whose core business models are inherently green.
Financing the transition to a sustainable future requires all types of financing, from use-of-proceeds green bonds to whole-of-company green equity. As momentum builds behind green equity frameworks and independent review practices become more established, this is an opportune time for continued experimentation and evolution.
With strong foundations in place and growing global participation, green equity has the potential to become a key complement to green bonds in scaling up finance for the net-zero transition.
Christa Clapp is the co-founder of Shades of Green & the global head of sustainable finance market analytics at S&P Global Ratings
