Contrary to investor perception, sustainable investments don’t always thrive when technology-oriented assets are leading markets. In fact, despite a huge rebound for the technology and communications services sectors in 2023, performance was a mixed bag for investments centered on environmental, social, and governance factors, according to Morningstar Indexes sixth annual sustainability index analysis, published earlier this week.
In calendar year 2023, 44% (64/146) of Morningstar’s sustainability indexes measured outperformed their non-ESG equivalents. This marks a turnaround from 2022, when ESG investments suffered from the downturn in technology-oriented sectors and the outperformance of carbon-intensive energy and utilities sectors, yet it’s still well behind the 57% outperformance recorded in 2021. For the five years ending in 2023, 61% of Morningstar’s sustainability indexes beat their non-ESG equivalents.
Morningstar Sustainability Indexes Risk/Return Record vs. Non-ESG Parent Index
Why the mixed performance for ESG-oriented indexes in 2023 despite the rebound in the technology sector? Blame it on the “Magnificent Seven.”
Robert Edwards, CFA – Director of EMEA & ESG Product Management, Morningstar Indexes
“Sustainable investing encompasses a wide range of approaches, which can lead to dispersion in investment results. In 2023, sustainability indexes designed to limit ESG risk suffered from limited exposure to the ‘Magnificent Seven’ stocks, which dominated equity market performance. For example, Meta and Alphabet face serious ESG controversies, while Tesla and Amazon.com have higher ESG risk relative to their sector peers, leading to a lower weight or exclusion from many ESG risk-oriented indexes. On the other hand, climate-oriented indexes, which focus on net-zero alignment, had a very strong 2023, driven by above-market exposure to the technology sector and an underweighting of carbon intensive sectors.”
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