July 08, 2024

Sustainable Investment Insights - July 2024

Quarterly report

ESG performance stands out in Q2

Q2 was a strong quarter for SI equity indices, with all five main global indices performing ahead of the market. ESG (FTSE4Good) stood out as the best performer in Q2, as well as in Q1 and over the last 12M. Looking at multi-assets, SI corporates outperformed, while SI sovereigns underperformed as did SI infrastructure and real estate. The SI market continues to struggle with weak fund flows, overcapacity in renewables and EVs, and changing SI regulations.

Key highlights:

  • SI Multi Asset - In addition to SI equity indices, we expand the coverage of the SI indices this quarter to include SI corporate and sovereign bonds and SI alternatives  ̶  infrastructure and real estate (EPRA Nareit). These additional indices add a range of different risk, return and correlation profiles across different SI methodologies, giving diversification opportunities for SI multi asset investors. 
  • ESG versus Climate - ESG (FTSE4Good) was the strongest of the global SI equity indices in Q2 and over 12M. This outperformance represents a change to the typical relationship of ESG indices underperforming climate/green indices in an upmarket. The performance was driven by the lower valuation and strong selection effect, particularly in Technology.
  • Technology versus Energy - Most SI equity indices benefited from an underweight in Energy, despite the oil price volatility during the quarter. However, the overweight in Technology had a larger, positive effect. Selection in Technology was also a significant effect, with different positioning between SI strategies, 4Good and TPI benefited, while EnvOps and LowCarb lost out.
  • Renewable Energy - The renewable energy sector continues to struggle due to overcapacity and falling prices, though it rallied at the beginning of Q2 in anticipation of high energy demand from AI.
  • SI Fixed Income - Most SI bond indices performed close to their parent indices; corporates were slightly ahead, sovereigns slightly behind. However, the green bond market saw a higher performance dispersion, notably in green sovereigns, which underperformed due to their longer duration.

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