Lee Clements
Henry Morrison-Jones, CFA
A tough quarter for SI equity indices
Q1 2025 was a period of heightened volatility and market rotation in the global financial markets. European equities outperformed US stocks, value outperformed growth, Energy was the highest performing ICB Industry in the FTSE All World index (and Technology was the lowest), and US bond yields fell whilst European bond yields rose.
All this created a challenging backdrop for the relative performance of sustainable investment (SI) indices: five of the six global/developed SI indices tracked in our quarterly Sustainable Investment Insights publication underperformed their market capitalisation-weighted reference benchmarks.
In particular, the underperformance of SI indices during Q1 was down to:
- An overweight allocation (and negative stock selection) in technology;
- An underweight allocation to energy;
- An underweight in aerospace and defence stocks, which performed strongly in Q1 in anticipation of a rise in European defence spending;
- And the 36% fall in Tesla’s share price.
The only equity index profiled in Sustainable Investment Insights to show relative outperformance was the FTSE Developed ESG Low Carbon Target Exposure. This index is value-oriented, with an underweight position in the Technology Industry and overweights in Financials, Telecoms and Consumer Staples.
Headwinds for green bonds
The market conditions also created headwinds for green bonds. The green bond market is heavily skewed towards European issuers and away from US issuers, both in corporate and sovereign debt. As such, the green bond market reflected broader bond market trends: in the US, falling yields reflected concerns about falling growth; meanwhile, in Europe yields rose in anticipation of expanded borrowing to finance defence and infrastructure spending. All this led to green bond index underperformance, with continued differences in regional bond yields likely to drive further divergence. However, both corporates and sovereigns continued to issue green bonds in Q1, with the sector representing 4.2% of all bond issuance in the quarter. In contrast to SI equities and green bonds, other global SI fixed income indices performed in line with the market.
Strong returns in infrastructure
The asset class showing strong returns in Q1 was alternatives (in particular, infrastructure), driven by falling US yields, the anticipation of greater government spending on infrastructure and its defensive qualities in times of volatility. The FTSE Global Core Infrastructure TPI Climate Transition index and the FTSE EPRA Nareit Developed Green Low Carbon Target index saw the best absolute performance of all the SI indices in Q1. The FTSE EPRA Nareit Green index was ahead of the market, whilst the FTSE Global Core Infrastructure TPI Climate Transition Index (‘Green Infra’) underperformed, due to a headwind from its overweight position in Railroads.
Relative performance of select global & developed SI indices
A rebound in April
April saw market volatility increase even further, as the new US administration’s tariff policy raised further concerns around global growth and inflation. However, towards the end of the month market conditions improved and the FTSE All-World index finished April with a 1% gain in US dollar terms.
Despite the increased volatility, SI indices saw good relative performance in April. In particular, the FTSE Environmental Opportunities All Share index, which had been the largest underperformer in Q1, was 1.7% ahead of the market.
SI indices’ performance was helped by the underperformance of the Energy industry, the worst-performing FTSE All World Industry in April. This followed a sharp fall in oil and gas prices, which in turn reflected concerns over falling global growth rates. Alternatives continued to show positive absolute returns in April, with Green Infrastructure 0.6% ahead of the market. Most SI fixed income indices were in line with the market, as they were in Q1. However, green bonds rebounded strongly in April, with both corporate and sovereign green bond indices outperforming the market. These indices’ European overweight positions benefited from a rise in US bond yields whilst European yields fell.
Rising sustainability and climate risks
As markets continue to focus on big-picture themes like trade, growth and geopolitics, they shouldn’t forget about sustainability and climate risks, which continue to build.
Global temperatures continue to climb[1], with the potential to create impacts across economies, from crop yields[2] to corporate productivity[3]. Weather- and climate-related physical risks come with significant costs, be it chronic air pollution in South Asian cities[4] or wildfires in North America[5]. These growing risks also have the potential to drive growth in the climate adaptation sector. Rising temperatures are also becoming a key driver of energy demand and emissions as people try to cope with a rising number of high heat days.
Impact of weather on energy and emissions growth in 2024[6]
The continuing push for energy efficiency
The broader energy transition continues to have strong momentum, despite volatile financial markets and geopolitical, regional and technological complexities. The transition has the potential to disrupt existing business models, as well as to benefit from the current drive for improved productivity.
- Renewable energy continues to see growth (clean power sources provided 51% of all utility scale electrical power in the US for the first time in March)[7].
- Electric vehicles continue to roll out (with the majority of new vehicles in China being electric or hybrid).[8]
- Artificial Intelligence (AI) and Technology provide massive climate opportunities (with a promise of a reduction in emissions of 5-10% by 2030[9]) and demand for energy efficiency and clean power for data centres.[10]
- Broader energy efficiency has driven a 12% improvement in energy use per unit of GDP and a 17% improvement in emissions per unit of GDP over the last 10 years. While the rate of energy efficiency improvement is slowing, energy efficiency is part of the drive for improved productivity in the face of the current uncertain economic climate.
Energy, Electricity and CO2 intensity per GDP (indexed)[11]
- Here, the rapidly falling price of clean energy equipment can also help to improve productivity.
Price of clean energy equipment vs oil[12]
[1] Copernicus: Warmest March in Europe and lowest Arctic winter sea ice | Copernicus
[2] Climate change impacts on crop yields | Nature Reviews Earth & Environment
[3] Global Economic Impacts of Physical Climate Risks, IMF
[4] Striving for Clean Air: Air Pollution and Public Health in South Asia
[5] Billion-Dollar Weather and Climate Disasters | National Centers for Environmental Information (NCEI)
[6] Global Energy Review 2025 – Analysis – IEA
[7] Fossil fuels generate less than half of US electricity for first month ever, says energy think tank | Reuters
[8] Automakers rush to meet surging China demand for long-range hybrids | Reuters
[9] New report from Google: AI and climate action
[10] Hank Paulson: Clean energy will be critical to winning the AI race with China
[11] Global Energy Review 2025 – Analysis - IEA
[12] LSEG data and Clean Energy Market Monitor – November 2024 – Analysis - IEA
Read more about
Disclaimer
© 2025 London Stock Exchange Group plc and its applicable group undertakings (“LSEG”). LSEG includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) FTSE Fixed Income Europe Limited (“FTSE FI Europe”), (5) FTSE Fixed Income LLC (“FTSE FI”), (6) FTSE (Beijing) Consulting Limited (“WOFE”) (7) Refinitiv Benchmark Services (UK) Limited (“RBSL”), (8) Refinitiv Limited (“RL”) and (9) Beyond Ratings S.A.S. (“BR”). All rights reserved.
FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, WOFE, RBSL, RL, and BR. “FTSE®”, “Russell®”, “FTSE Russell®”, “FTSE4Good®”, “ICB®”, “Refinitiv” , “Beyond Ratings®”, “WMR™” , “FR™” and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of LSEG or their respective licensors and are owned, or used under licence, by FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, WOFE, RBSL, RL or BR. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator. Refinitiv Benchmark Services (UK) Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.
All information is provided for information purposes only. All information and data contained in this publication is obtained by LSEG, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical inaccuracy as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of LSEG nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or LSEG Products, or of results to be obtained from the use of LSEG products, including but not limited to indices, rates, data and analytics, or the fitness or suitability of the LSEG products for any particular purpose to which they might be put. The user of the information assumes the entire risk of any use it may make or permit to be made of the information.
No responsibility or liability can be accepted by any member of LSEG nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any inaccuracy (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of LSEG is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.
No member of LSEG nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing in this document should be taken as constituting financial or investment advice. No member of LSEG nor their respective directors, officers, employees, partners or licensors make any representation regarding the advisability of investing in any asset or whether such investment creates any legal or compliance risks for the investor. A decision to invest in any such asset should not be made in reliance on any information herein. Indices and rates cannot be invested in directly. Inclusion of an asset in an index or rate is not a recommendation to buy, sell or hold that asset nor confirmation that any particular investor may lawfully buy, sell or hold the asset or an index or rate containing the asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.
Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index and/or rate returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index or rate inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index or rate was officially launched. However, back-tested data may reflect the application of the index or rate methodology with the benefit of hindsight, and the historic calculations of an index or rate may change from month to month based on revisions to the underlying economic data used in the calculation of the index or rate.
This document may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of LSEG nor their licensors assume any duty to and do not undertake to update forward-looking assessments.
No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of LSEG. Use and distribution of LSEG data requires a licence from LSEG and/or its licensors.
