In our 2023 end-of-year ethical investment review, we encouraged investors to stay patient as the challenges of 2022 began to ease, and early signs of recovery appeared in the ethical investing market. Now, as we move through September 2024, we’re pleased to see many of these green shoots taking root and the challenges receding.
What we’re seeing:
- Falling inflation
- Gradually dropping interest rates
- Improved performance from small-cap companies
- The election of a greener government in the UK
The future of ethical investing is looking much brighter.
Performance update
After a tough few years, our Ethical portfolios have delivered strong absolute returns in 2024 (up to the end of August) and on a relative basis, they’ve performed well. As shown in the chart below for Risk Grade 6, both our Active Ethical profiles and Passive ESG solution are ahead of their IA Mixed (20-60% Equity) sector peers.
Ethical Active & Passive ESG (Risk Profile 6) performance YTD
Source: Parmenion, FE Analytics, Dec 2023 - August 2024
Our funds are benefitting from broad macroeconomic improvements and shifts in the ESG sector. Below, we’ve highlighted some of the key trends driving this success.
Macro improvements: What’s in it for us?
With inflation dropping from historic highs and interest rate cuts already underway in the UK, EU and US, Growth-style investing is set to benefit. Ethical portfolios, often biased towards modern, innovative, and fast-growing companies are well-positioned in this environment.
Small and mid-cap companies, which ethical funds tend to favour, have underperformed their larger counterparts in recent years, but have begun to perform better and seem poised to continue as inflation and interest rates become more supportive.
ESG trends: What’s driving change?
The US tech rally, driven by the Magnificent 7, created challenges earlier this year. While Nvidia and Microsoft are widely held in ethical portfolios, the other five (Alphabet, Amazon, Apple, Tesla and Meta) are often excluded from ethical funds due to concerns like online safety, labour rights and poor working conditions. As a result, many ethical portfolios lagged behind the dizzying market rises seen during Q1 2024. However, being underweight to the Magnificent 7 helped protect ethical portfolios from recent flash corrections that wiped out hundreds of billions from their valuations, highlighting the concentration risk of holding such high allocations to so few companies.
Green energy: A promising outlook
On the renewable energy front, there are promising signs. The new UK Labour government is setting up clean energy initiatives, like GB Energy and boosting onshore wind projects. Renewable energy prices have risen, with one recent auction seeing Orsted and Iberdrola successfully bidding for and winning new contracts that could power around 11 million homes. Given the amount of borrowing involved in these projects, this is yet another sector that could benefit from falling interest rates.
We are seeing encouraging signs of improvement in the renewable energy infrastructure space. After a tough 18 months of interest rates rising, it’s positive to see our investment in this sector delivering a solid return of around 9% over the past six months leading up to August 31st.
One country not often associated with clean energy is China. However, they’re currently building more wind and solar projects than the rest of the world combined, smashing Xi’s 2030 target to reach 1,200 gigawatts of clean energy capacity six years early.
China clean-energy construction exceeds rest-of-world
Source: Global Energy Monitor, Apollo Chief Economist. Data for China and European countries to June 2024. All other countries to December 2023.
Looking ahead: What’s next for ethical investors?
While possible risks (like inflation surprises or a Trump comeback) can’t be ignored, there’s plenty for ethical investors to be optimistic about. The macro-outlook is improving, and it looks like we may have dodged a major recession. After hitting a low in 2023, it’s exciting to see European sustainable fund flows starting to curve upwards since the end of the year.
European sustainable fund flows versus mainstream flows (USD billions)
Source: Morningstar, June 2024
What we’ve been up to
We’ve been busy this year, enhancing our ethical and ESG offerings. We’ve added a dedicated small-cap allocation to our higher-risk graded Ethical Profiles within Profiles A-C and our passive ESG solution. On top of that, we’ve fine-tuned several of our equity and bond fund blends to keep investing in the funds we believe in most.
Working closely with our Ethical Oversight Committee, we’ve kept regular meetings with our existing fund managers, as well as meeting with new ones, to ensure we stay on top of the ever-expanding ethical and sustainable fund universe. We’re also ensuring we keep ahead of new developments, such as the introduction of SDR regulations, while pushing forward with our own climate commitments.
Want more details? Keep an eye out for our full 2024 review later this year, or feel free to get in touch if you’d like to know more.
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.
