Mid-year momentum: ESG investing in 2025
After a turbulent period for ethical investing, the first half of 2025 has offered reasons for renewed optimism. While Q1 remained subdued, the second quarter showed how our ESG Growth solutions can thrive in more supportive market conditions. In this article, we take a closer look at performance so far, and the reasons we’re optimistic about what’s ahead.
A changing market backdrop
In the first quarter, market leadership shifted, with the previously untouchable “Magnificent 7” coming under pressure. The idea of US exceptionalism was being questioned, while Chinese companies like DeepSeek were emerging as serious competition for AI dollars. At the same time, the EU ramped up fiscal stimulus, particularly for defence, which drove strong performance in that sector.
Elsewhere, metals, tobacco, and oil & gas were the leading sectors in Q1 - an environment that’s naturally difficult for ethical portfolios. Despite some calls to allow for defence to be included in ESG portfolios, we’re holding firm on our exclusion policy outlined here.
Fast forward to Q2, despite a bout of initial volatility in early April following ‘Liberation Day’ tariff announcements, our ESG Growth solutions rebounded strongly. Shown in the chart below (Risk Grade 6), all four active ESG Growth portfolios, and our Passive ESG Growth option have outperformed the IA Mixed Investment 20-60% benchmark.
After several years where the largest companies drove the majority of returns, Q2 marked a shift, with small and mid-sized companies faring better. It also wasn’t all about US equities - or the US dollar - outperforming. Other regions have rallied strongly in recent months. This broader market performance played to the strengths of our ESG Growth solutions, particularly their diversification and exposures to the UK, Europe and Emerging Markets, as well as their mid and small caps holdings.
At the sector level, renewable energy also stood out, boosted by a rise in merger and acquisition activity, with deals transacting at premium prices. Together, these developments highlight how diversification across countries, sectors and investment styles can support performance when markets widen out.
Positioning for consistency
Our aim is to build well-diversified portfolios, that deliver consistent performance and align with client objectives. With that in mind, we’ve added more value exposure to the active ESG Growth solutions to help balance the quality and growth bias typically found in ethical and sustainable funds.
Specifically, we added the Schroder Global Sustainable Value Equity fund into Sustainable Growth (previously Profile B), and Sparinvest Ethical Global Value Equity into Ethical Growth (Profile C). Both offer strong value exposure without compromising on the ethical or sustainable criteria. We also added Regnan Sustainable Water and Waste to Screened Growth (Profile D). While not value-focused, it’s a core fund that helps diversify against the more growth-biased funds in the portfolio. We’ve added two new Emerging Markets funds to add further diversification: JPM Emerging Markets ESG Equity into Ethical Growth (Profile C) and Carmignac Emerging Markets into Ethical Growth and Screened Growth (Profile C & D).
Driving value for clients
We’ve been negotiating hard with our underlying fund managers to access more cost- effective share classes. As a result, the ongoing fund charges for Risk Grade 6 of our active ESG portfolios have fallen by between 5-12% over the last 12 months. Further fee reductions have also been agreed and will be applied in the coming weeks. All savings are passed on in full to clients.
We’ve continued to meet regularly with our independent Ethical Oversight Committee (EOC), to support our in-depth research into ESG funds and broader ethical investing topics. Recent discussions have included how managers are engaging with US companies amid the current ESG backlash. Encouragingly, fund managers have confirmed there’s no change in practise to how they’re engaging on ESG topics, despite having to occasionally temper their public-facing wording to avoid political scrutiny. We also continue to track the progress of the UK’s SDR framework, and a number of funds held in our ESG Growth solutions have now achieved sustainability labels.
More broadly, we’ve remained active in our ESG initiatives. In H1, we published our second annual Taskforce for Climate-related Financial Disclosures (TCFD) report and updated our Responsible Investing policy. These reinforce our long-term commitment to investing – and operating - both ethically and sustainably, with net zero as our ultimate goal.
Looking ahead: a bright outlook
Despite a challenging few years, the second quarter of 2025 shows how ethical and sustainable portfolios can perform strongly in more balanced market conditions. With growing momentum behind regulation and progress towards net zero, particularly in the UK, Europe, and China, we remain confident in the long-term outlook for ESG investing.
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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.
