QUARTERLY REPORT
Mixed Q4 ends a challenging year for SI
Q4 saw a broad variation in the relative performance of SI indices. Climate-focused equity indices outperformed, while ESG-focused indices underperformed. SI Alternatives and SI Sovereigns were weak, and SI Corporates performance was in line with the market, though both sovereign and corporate green bonds outperformed. 2024 was also challenging for SI overall, with mixed performances. Fund flows into the sector weakened versus the broader market, and there were geopolitically-driven concerns around the direction of regulations, despite a strong rise in global temperatures.
Key highlights:
- Climate versus ESG SI Equities - The performance of SI equity indices was mixed in Q4, with climate-focused indices, such as PAB and EnvOps outperforming the market, and ESG-focused indices, such as FTSE4Good underperforming. The main reason for this disparity is their specific over or underweight position in Tesla, which has a large weight in parent indices and rose 54% in Q4. Tesla has a high percentage of green revenues, but a weak ESG score.
- Alternatives weaken on rising yields - SI real estate and infrastructure indices underperformed in Q4 as yields rose. This reversed much of the strong performance in alternatives in Q3, when yields fell.
- Green bonds strong; corporates in line with market; and sovereigns weak - SI fixed income performance was impacted by rising yields in Q4, especially in the US. SI sovereigns underperformed, mainly due to longer durations, while SI corporate returns were in line with the market. Green bonds outperformed the market in Q4 due to shorter active duration and an overweight in banks and utilities in Green corporates, and a US underweight in Green sovereigns.
- Rising temperatures, rising challenges, new opportunities - Global temperatures have continued to rise in 2024, with an average of 1.6oC above pre-industrial period (1850-1900). While installations in solar PV and unit sales of electric vehicle have continued to grow, they have both come under pressure from tariffs, and global GHG emissions rose in 2024. However, as the industry continues to evolve, new areas are developing, including the impact of artificial intelligence, a potential renaissance in nuclear power and developments in SI regulation.
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