January 08, 2024

Sustainable Investment Insights - January 2024

Quarterly report

Sustainable investment sees a strong end to 2023

Sustainable investments finished the year on a positive note, with all global SI indices outperforming their benchmarks in Q4, in stark contrast to 2022, where all but one strategy, underperformed. Climate strategies saw the strongest full year performance, particularly Env Ops and PAB. However, going into 2024, the sector needs to manage weaker flows into SI funds and analyse the impact of COP28.

Key highlights:

  • Global outperformance, but mixed regional results - While all of the global SI indices outperformed in Q4, the performance was mixed across geographies. ESG focused strategies generally registered the lowest returns, with ESG Low Carbon (which does not have a global index) underperforming within Developed Markets. Japan, which was the best performing region in Q3, saw all the SI indices underperform in Q4.
  • 2023 performance - 2023 saw all global SI equity indices outperforming. This is in stark contrast with 2022, where all but one strategy, underperformed. Climate strategies fared best, while ESG strategies were weaker.
  • Energy versus Technology - Energy and Technology are two important industries that impact SI indices. Although the Q4 weakness in the oil price and Energy equities were a tailwind for SI indices, the recovery in Technology was the most influential in their outperformance over 2023. 
  • Macro - Falling inflation (albeit with weaker growth), combined with a more dovish Fed narrative, led to the sharp decline in bond yields, especially in long maturities, resulting in flatter curves. This led to a resurgence in risk assets, particularly equities, though high yield credits also held up well.
  • COP - COP28 became the focus of intense discussion, as fossil fuels were mentioned in the official statements for the first time, recommending countries transition away from their use in energy systems. Eight recommendations were agreed, including tripling the renewable energy capacity, doubling the annual rate of energy efficiency improvement and reducing methane emissions, all of which should have tangible impacts both for investors and the global environment.

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