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Analysis

In a Mixed Year for Sustainable Investing – Most Climate and Net Zero-Aligned Indexes Outperformed in 2024

January 28, 2025


January 28, 2025


The Takeaway

  • In calendar-year 2024, 45% (60/133) of Morningstar Indexes’ sustainability benchmarks outperformed their non-ESG equivalents, up from 44% outperformance in 2023 and 27% in 2022.
  • Climate and net-zero-aligned indexes had a very strong year, with 77% (20/26) outperforming their broad-based benchmarks. Tilts away from the energy sector and toward technology and consumer cyclicals were the main drivers of the outperformance.
  • Morningstar Indexes’ flagship climate benchmark series, the Morningstar Low Carbon Transition Leaders (LCTL) Indexes had a banner year, with 89% (8/9) beating their benchmarks. Despite overweighting energy and underweighting technology, the Morningstar Global LCTL Index outperformed its benchmark by 4.1% in 2024.

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The performance of sustainability indexes varied widely in 2024. On the one hand, climate indexes had a banner year, powered by exposure to Nvidia, Tesla, and other members of the “Magnificent Seven.” On the other hand, impact-aligned indexes—which generally select and overweight companies that contribute positively to the planet or society—struggled relative to the broad market.

Concentration in global equity market leadership in 2024 led to uneven performance across sustainability indexes. Many of these indexes use a best-in-class selection methodology, meaning they include only the highest-rated stocks based on ESG risk within each sector. Since recent top market performers have been concentrated in just a few sectors, this approach often resulted in missing out on certain high-return securities. In these cases, the underperformance of sustainability indexes was driven more by idiosyncratic risk than systematic risk.

Indexes using ESG risk-focused security selection or tilting weight mechanisms slightly underperformed the broad equity market in 2024. Climate indexes, which use similar mechanisms but largely utilize emissions intensity or forward-looking climate metrics, largely outperformed the market in 2024. Similar to 2023, relative over or underperformance in 2024 was primarily driven by security selection.

annual 2024 esg risk return paper exhibit 6.png

©2025 Morningstar. All Rights Reserved. The information, data, analyses and opinions contained herein (1) include the proprietary information of Morningstar, (2) may not be copied or redistributed, (3) do not constitute investment advice offered by Morningstar, (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete or accurate. Morningstar has not given its consent to be deemed an "expert" under the federal Securities Act of 1933. Except as otherwise required by law, Morningstar is not responsible for any trading decisions, damages or other losses resulting from, or related to, this information, data, analyses or opinions or their use. References to specific securities or other investment options should not be considered an offer (as defined by the Securities and Exchange Act) to purchase or sell that specific investment. Past performance does not guarantee future results. Before making any investment decision, consider if the investment is suitable for you by referencing your own financial position, investment objectives, and risk profile. Always consult with your financial advisor before investing.

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