The Takeaway
In calendar year 2023, 44% (64/146) of Morningstar's sustainability indexes outperformed their non-ESG equivalents, up from 27% outperformance in 2022 but down from 57% in 2021. Despite mixed performance for sustainability indexes in 2023, the five-year numbers remain strong.
From 2019 to 2023, 61% (89/146) of Morningstar’s sustainability indexes beat their non-ESG equivalents. For the five-year period ended 2022, 78% outperformed.
On the ESG risk side, 57% (83/146) of Morningstar’s sustainability indexes lost less than their non-ESG equivalents during down periods between 2019 and 2023, as measured by the downside capture ratio. This number is down from the five-year period through 2022, when 70% of sustainability indexes had lost less in down markets.
Market dynamics are typically favorable for investments centered around environmental, social, and governance factors in periods when less carbon-intensive sectors like technology and communication services outperform. However, the top-heavy nature of global equity market returns in 2023 led to disjointed performance for sustainability indexes, as many missed out on certain members of the “Magnificent Seven.” Meanwhile, climate indexes, such as those focused on net-zero alignment, had a bounce back year, helped by above-market exposure to the technology sector. These indexes also benefited from tilting away from high carbon intensive sectors, which underperformed in 2023.
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