Rising Stars: the intersection of global equities and sustainability

Looking across our Elite Radar funds, it’s possible to discern a bit of a trend. While most are quite different from each other in what they invest in and where, out of 38 funds, six are simultaneously investing in the responsible asset universe, and are global funds. This got us thinking about why this crossover is popular among these rising stars.

Of the six Radar global responsible investment funds, five have only launched in the past three years – JPM Climate Change Solutions (2021), Artemis Positive Future (2021), CCLA Better World Global Equity (2022), R&M Global Sustainable Opportunities (2022), and Redwheel Biodiversity (2023) – and the final one, WS Montanaro Better World, launched in 2020.

In the past four years since all these funds launched, both sustainable investing and global equities have been through a bit of a rollercoaster. Let’s take the sustainable part first.

Learn more about our Elite Radar badge.

Sustainable investing rollercoaster

Sustainable funds had been a darling of investors for the three years since 2020, with an explosion of new products, marketed like crazy to attract cash, and solid performance. That popularity took a turn last year.

Investors pulled $2.5bn out of global sustainable funds in the last quarter of 2023*, the first time net flows fell into negative territory. US redemptions hit a record $5 billion, and a total of $13 billion over 2023*, as the country’s political backlash against sustainable funds intensified. Europe held up better, taking in $3.3 billion in Q4, thanks to $21 billion from passive funds*. Actively-managed rivals, however, bled close to $18 billion*.

Headlines subsequently declared sustainable funds’ boom time is over. This isn’t really fair. Part of the story is a hangover from the strong performance of oil and gas stocks in 2022, a sector most sustainable funds do not invest in and so missed out on gains and investor money well into 2023.

Also the initial gold rush that helped propel sustainable funds into the spotlight has waned a bit, and the shine of their newness has come off. Now they must fight for their place among conventional (non-sustainable) funds – but fighting they most definitely are.

Global sustainable funds still gathered $63 billion in 2023*, and European sustainable funds – by far the largest market – garnered $76 billion*. By comparison, European conventional funds suffered annual outflows of $50 billion*.

Strategies for sustainable success

Charlotte Ryland, head of Investment at CCLA Investment Management, says sustainable funds that have struggled are those that have a narrow focus on ‘sustainability winners’, where valuations had become too high, in areas such as green energy.

CCLA Better World Global Equity’s approach to sustainability allows it to invest broadly in attractively-valued opportunities, “rather than simply investing in companies that are already leaders from a sustainability perspective, we use our portfolio as a platform for real-world change,” says Charlotte.

Sustainable investing remains central to long-term value creation in this era of global warming and social inequality, according to a report published by Amundi asset management**.

Katie Magee, an investment specialist at J.P.Morgan, points to estimates that “hundreds of trillions of dollars of investment will be required to decarbonise the economy over the next three decades”, and a meaningful pick-up in investment into cleaner forms of energy, which topped $1.7tr in 2023***.

From regulatory shifts to demand from institutional investors like pension funds, sustainable investing is here to stay as a direction of travel. What has happened in the four years since these sustainable Radar funds launched is it has entered the mainstream – so investors can expect to face some of the same setbacks as with conventional funds, as well as potential gains.

The global investment landscape

Turning now to the global investing aspect of our sustainable Radar funds. The big question here is can global stocks repeat last years’ stellar performance, their strongest year since 2019 judged by the MSCI World index, a broad gauge of global developed market equities, which had surged by 16% since late October and ended the year up 22%****.

The catalyst was America’s S&P 500 index, up 24% in 2023****, ending the year just below its all time record, driven by the eye-watering performance of the so-called ‘Magnificent Seven’ stocks and the belief that interest rates will be cut sooner than previously thought, after data showed inflation falling faster than expected in western economies.

Global equities take their lead from the US. Investors should expect more volatility, and times when an overall bullish view of the market will be in jeopardy. But so far this year, an uptick in retail fund flows, the end of the Fed’s rate hikes and a US presidential incumbent seeking re-election are among the positive indicators for the sector in 2024^.

However, William Lough, lead manager of the R&M Global Sustainable Opportunities fund, believes there is a rich opportunity set within global equity markets away from the US mega-cap tech-dominated S&P 500 into smaller companies. In aggregate, the companies in his fund have had US levels of return on capital, at (lower) UK or European valuations, he points out.

“We still see the average ‘ESG fund’ as being heavily invested in good quality but expensively-valued companies and see a strong argument that flows should be directed towards value-orientated strategies like ours, for both return-seeking and diversification reasons,” he says.

Navigating 2024’s challenges

In both the sustainable investing and global equity space, there is a lot happening in 2024, as we continue to see geopolitical forces at play and a significant focus on interest rates and funding.

But against this backdrop, Amanda O’Toole, manager of the Redwheel Biodiversity fund, highlights a number of multi-decade structural shifts underway – “notably the climate transition, protection of natural ecosystems, digitalisation and electrification of the global economy”.

Transitions of this magnitude create both investment risk and significant opportunity. “Businesses must have durable business models, strong management and robust, well-funded strategies in place to harness the opportunities,” she says.

To thrive, investors “must differentiate the best positioned from the rest of the pack and use this information to identify mispriced assets”, Amanda adds.

We tend to agree this is true especially in the global sustainable equities space. That’s where we hope our Radar funds come in, helping investors to pick out the best up-and-coming funds from a crowded field. The crossover between sustainable investing and global equities, with the funds we’ve mentioned in this blog, is a great place to start.

*Source: Morningstar, Global Sustainable Fund Flows, Q4 2023

**Source: Amundi Asset Management, 1 December 2023

***Source: J.P.Morgan Asset Management, data at 31 December 2023

****Source: Financial Times, 30 December 2023

^Source: Morgan Stanley, 7 February 2024