Exclusive research from Lombard Odier and the University of Oxford on green competitiveness in the global economy

Present and future green winners

The world is entering a phase of evolving comparative advantage, as environmental challenges become increasingly pressing. Who are the likely winners and losers from this transition?

A new report produced through the research partnership between Lombard Odier and the University of Oxford, “Predictors of Success in a Greening World”, makes use of cutting-edge analysis to identify which countries are specialising in high-growth green industries, those which are laggards, and the investment implications at the corporate level.

The aim of the report is to help investors navigate this changing landscape by analysing which countries and industries are well-placed in terms of their current and future green competitiveness. Two key metrics form the basis of this analysis:

• Green Complexity Index (GCI), which measures the number and complexity of green products that a country has exported competitively and constitutes a composite measure of green competitiveness.
• Green Complexity Potential (GCP), which measures each country’s average proximity to complex green products that it does not yet export competitively, and serves as a predictor of a country’s future GCI.

Identifying potential winners and losers

While all regions and countries have some form of green comparative advantage or potential, some are much further ahead than others. Europe, North America, China, Japan, and India rank highly among regions for green complexity; Africa, Australia and parts of South America rank lowest. The disparity is explained to some extent by the fact that green competitiveness appears to have a clear positive correlation with income level.

The reports finds that most countries with below-average GDP per capita also rank below average in GCI, such as Brazil. Countries with high GCI tend to be higher income states, such as the US, Switzerland, or Singapore. Nevertheless, there are low- and middle-income countries with above-average GCI, such as China, and high-income countries with relatively low GCI, such as Australia and the UAE.

The difference is even more pronounced in terms of GCP than for GCI and shows very different patterns. Asia’s exports are getting greener, as are southern Europe’s, while large parts of Europe and North America are ranked somewhat lower by GCP than they are by GCI. Africa and South America have diverging regions. China currently ranks first in the world on GCP, followed by Italy and Spain.

Investment implications

Investors hoping to gain exposure in rapidly growing clean-technology industries can draw upon GCI and GCP scores to better understand which countries are currently nurturing competitive industries, and which are likely to do so in the future. However, these scores are only one kind of indicator and are by no means exhaustive or prescriptive when making investment or policy decisions. The connection is better understood through an examination of the relationship between countries' green competitiveness and their corporate structures.

In the renewable-energy technology sector, the development of wind and solar products provides one of the largest contributions to a country’s green competitiveness, as they involve the greatest number of specific green inputs in the construction of facilities. Institutional investors can play a key role in facilitating growth in wind and solar capacity, forming a substantial pool of private capital that is increasingly being directed at renewables. Pure-play wind and solar companies, making up a complex value chain that operates across globally integrated supply chains, are an increasingly central focus for investors who want to gain exposure to the clean-energy transition.

To combine country-level and company-level perspectives, the report constructs a global sample of major wind and solar companies. It identifies 93 companies from 19 countries, providing a view of the corporate landscape for the wind and solar industries. China, Germany, Japan, South Korea, Taiwan, and the US have the highest number of product-manufacturing companies in the sample; many of these are concentrated in the solar panel components sector. China, the US, and Japan (already with the highest solar GCI ranking) are simultaneously set to consolidate country-level complexity in solar products, all with high GCP rankings.

As this report shows, a global green race is underway; a race in which early movers will be rewarded and laggards will risk losing global competitiveness. Investors aiming to curate portfolios that stand to maximise value as the sustainability transition progresses would do well to disentangle short-term noise from long-term trends.

The full report is available for download by clicking on the download button.

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