QUARTERLY REPORT
SI challenged by volatile markets in Q1
Global market rotation led to the broad underperformance of SI equity indices in Q1. Tech overweight, Energy underweight and Aerospace and Defence underweight were all headwinds. SI fixed income saw a better performance, with positive returns, as falling yields supported markets, and broadly inline relative performance. The exception was the Green bonds market, hit by rising yields in the overweight European market. The SI market remains challenging in 2025, with fund outflows in Q1. SI investors remain focused on the direction of government support as climate physical risks grow.
Key highlights:
- SI equity indices underperformed in Q1 - The equity market rotation in Q1, particularly in March, led to the underperformance of most SI equity indices. It saw a reversal of numerous performance drivers from Q4, with the outperformance of Energy and underperformance of Tech causing particular headwinds. The underweight in Aerospace and Defence in most SI indices was also a headwind, particularly in Europe. One outperformer in Q1 was Developed Low Carbon, which benefitted from an underweight in Tech and overweight in Financials.
- Alternatives market strong - Infrastructure performed strongly, driven by expected increase in fiscal spending, however green infrastructure was behind the market due to an overweight in Railroads.
- Corporates performed well despite spread widening. European and US yields diverge - SI fixed income performance was largely defined by European versus US active weights. Falling US real yields rewarded higher US weights. As a result, Green bonds, which are underweight the US versus Europe, underperformed. SI Sovereign returns were broadly positive, except for Advanced Climate WGBI, while SI Corporates were positive across the board as spread widening was largely offset by lower benchmark yields.
- SI markets see continued pressure - Q1 was a challenging period for the SI market, with growing global economic and geopolitical uncertainty on top of SI policy cross-currents all impacting sustainable investors. Flows in SI funds turned negative in Q1, particularly in March, led by weakness in Europe, equities and active funds. Underperformance of global SI equity funds has been a headwind, though negative flows have so far been limited. The SI market is closely watching the potential impact of government support, corporate disclosure and trade policies, as well as the growing impact of climate physical risks.
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