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What are the greenest economies, and which economies will be most sustainable in the future?

How can we identify the green economies rapidly, without in-depth environmental analysis?


 

Keywords: which countries are most carbon efficient, which countries are environmentally sustainable, green growth, esg considerations, green economy examples, green economic growth, green growth, green economic growth.

 

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Environmental Social and Governance (ESG) concerns are at all-time high. Of course, investments unsustainable, as per the ESG considerations, are not likely to perform well in the long run. Countries that are 'green,' or 'relatively greener' should, over time, have a stable positive growth compared to those that do not take the environmental concerns seriously.


Furthermore, several market-moving financial institutions, such as Norway's sovereign wealth fund, have committed to investments that strictly adhere to ESG best practices. Logically, thus, as more and more important, market-moving funds increase their investment in green companies and green economies, an intelligent investor should do better by understanding which economies are greener compared to others. It is logical to expect the main stock indexes of these countries to perform better than those that are not performing well in terms of environmental considerations.


How can we analyze which economies are green and expected to perform well in terms of environmental concerns?

Environmental sustainability is a complex topic that demands an analysis of many variables to come to a conclusion. However, in terms of investment-related analysis, we need substantial agility to dynamically make decisions, very quickly, if need be. Thus, we cannot conduct complex environmental analyses whenever we need to re-evaluate our positions because if we waste precious time in readjusting our positions, those that can do so quickly will gain a competitive advantage over us.


The need, therefore, is of a proxy that we can use to assess the environmental sustainability of an economy, so we can make decisions rapidly and dynamically.

So, what proxy can we use to assess whether an economy is green?

To bypass a complex analysis, we can use the World Bank's GDP by unit of energy used indicator (Link).

The 'GDP per unit of energy used' measures how energy efficient productivity in an economy is. For example, a country that uses less energy to produce more productivity has a higher GDP per unit of energy used value in the indicator, and should thus be more efficient and, logically, greener, compared to countries that are less energy efficient in their production; i.e., countries that use more units of energy for production.


So which economies are greenest and thus more environmentally sustainable?

As per the World Bank's GDP by unit of energy used indicator (Link), the following large economies have the most energy-efficient productivity (Some smaller countries with a higher ranking are omitted due to minimal investment opportunities)(GDP by Unit of energy stated as GUE):


1. Hong Kong SAR, China (GUE: 29)- growth rate (2005-20015): 2.7%

2. Panama (GUE: 25)

3. Ireland (GUE: 25) - growth rate (2005-20015): 4.5%

4. Switzerland (GUE: 22) - growth rate (2005-20015): 2.5%

5. Sri Lanka (GUE: 22.2)

6. Malta (GUE: 21)

7. Dominican Republic (GUE: 19)

8. Bahamas (GUE: 19)

9. Colombia (GUE: 19)

10. Denmark (GUE: 19)


These economies are the most energy-efficient when it comes to their productivity. They use the lowest amount of energy for productivity and, deductively, are the greenest economies that should be considered environmentally sustainable.


What about the least energy-efficient and environmentally most unsustainable economies in the world?

As per the World bank's GDP by unit of energy used indicator (Link), the following large economies have the worst energy efficiency when it comes to productivity (Some smaller countries with a higher ranking are omitted due to minimal investment opportunities):


1. Turkmenistan (GUE: 2.5)

2. Ethiopia (GUE: 3.4)

3. Zimbabwe (GUE: 3.5)

4. Uzbekistan (GUE: 3.9)

5. Iran (GUE: 4.3)

6. Libya (GUE: 4.3)

7. Tanzania (GUE: 4.5)

8. Bahrain (GUE: 4.5)

9. South Africa (GUE: 4.8)

10. Ukraine (GUE: 5) * Iceland omitted due to its requirements mainly being met from renewable sources.


These economies are the least energy efficient when it comes to their productivity. They use the highest amount of energy for productivity and, logically, are the 'least green.' These economies should be considered the least environmentally sustainable economies in the long run, if they don't make any significant improvement.


Nonetheless, there are other significant variables that one must consider, such as pollution and deforestation levels, etcetera; however, as elaborated earlier, the purpose of this report is to identify the most reliable proxy to make a rapid readjustment in positions and allocations, if need be.


With more and more pressures on funds to only consider ESG best practice adhering opportunities, if the top 10 most energy-efficient economies maintain their efficiency or improve it, they should, theoretically, see a higher inflow of investments. However, one should also use judgment and consider other fundamentals to holistically evaluate an economy's long-term prospects, before allocating any capital.


Finally, it is also important to note that the global energy efficiency, long-term, is on an upward trend, with an average growth rate (geometric mean, 1990 -2014) of 1.3%. Although not good enough, considering the current climate crisis, we are seeing a gradual improvement over time.




What makes economies green and energy-efficient?

The primary reason for an economy being more energy efficient is efficient capital and Total Factor Productivity (TFP), or its technological ability being superior compared to others. Two economies with the same level of labor participation and capital invested can have different energy efficiencies, based on the technology used for producing output. Thus, alternatively, we can also assess the rate of TFP increase of various economies to assess why some economies, with similar labor participation and capital investment, have varying energy efficiency.


Economies that are technologically advancing at a rapid pace should also make their way into the top 10 most energy-efficient economies list. Thus, the faster the technological advancement rate, the quicker an economy should progress towards a greener future. This understanding should also be integrated into the assessment models to evaluate where future capital flows may go and which nations would be considered the most environmentally sustainable.