ESG vs non ESG portfolios: the impact of “Magnificent Seven” on ESG indexes and passive sustainable investing strategies
Although environmentally and socially responsible strategies do not guarantee per-se a positive financial performance, also in the current market environment comparative returns analysis has shown that a company particularly attentive to ESG criteria not only has a lower risk of incurring into frauds, scandals, sanctions and reputational damages, but these companies are being also recognized by investors and by their valuations. At the same time, the exposure to sustainable investment themes (e.g. renewable energy, circular economy, healthcare and well-being thematics, demography issues, social and Green Bonds) have been able to generate higher returns compared to non ESG-focused strategies in the long term.
Empirical evidence demonstrates that the main ESG equities indexes have outperformed the corresponding non-EGS benchmarks over the last three years and on YTD basis, and the outperformance in 2023 was more marked on global-US markets than in Europe. As an example, MSCI World ESG Leaders index has outperformed the traditional MSCI World by approx. 1,80% in 2023, and the ESG over-return is less pronounced within European indexes, with MSCI Europe ESG Leaders having a +0,88% higher return than MSCI Europe. (Source: Bloomberg, end of December 2023 data).
Figure 1 : 2023 Equity ESG vs Non-ESG Indexes
2023 performance are heavily pushed up by the returns of the so-called “Magnificent Seven”, which weights for approx. 18,7% of the MSCI World index (and +15,55% of the 2023 returns, out of the +19,60%), while among the ESG leader index, their weight is higher and close to 20%, and this slight overweight led to +3,18% of returns in 2023 compared to the parent index. Worth to mention, three out of seven of these seven companies are excluded from the MSCI World ESG Leader index, and the other four are equally over-weighted compared to the parent index.
Uranium as a facilitator for the migration from fossil fuel energy generation
A prominent investment theme that gained momentum in 2023 and is expected to exhibit stronger performance in 2024 is the investment in uranium. This heavy metal plays a crucial role in energy-efficient production and was extensively debated during the last COP (Conference of the Parties). It has been acknowledged as a valuable alternative to fossil fuel-based energy production, making it indispensable for the energy transition.
Power generation from uranium seems to be a solution to convert the smallest amount of input into the maximum possible output, boasting a remarkable 92% capacity factor. Moreover, it is an energy source with a considerably lower environmental impact, primarily in terms of CO2 emissions compared to fossil fuels. The capacity factor argument is essential and puts nuclear energy in a dominant position, especially when compared to other renewable energy sources (solar has a capacity factor of around 25%, and wind around 35%).
Despite the growing interest in this topic, the debate on the use of nuclear energy continues to exist and divide opinions. Supporters highlight how nuclear energy is among the most sustainable and essential in reducing and containing climate change. Opponents, on the other hand, emphasize the negative environmental aspects arising not from the use of energy but from the extraction techniques of the material and the storage of radioactive waste.
FARAD I.M.’s sustainable investment solution
In the context of identifying the truly sustainable strategies to avoid investing in greenwashing solutions, FARAD Investment Management has developed GreenEthica Sustainable Reporting (“GSR”), a unique solution that assesses the exposure of any securities, fund or portfolio to ESG criteria and their alignment to the 17 UN Sustainable Development Goals (“UN SDGs”).
GSR is designed to provide comprehensive insights into the environmental, social, and governance performance of portfolios, and it aims to bridge the gap between financial objectives and sustainability goals by offering a transparent evaluation framework. What sets GSR apart is its focus on aligning investments with the UN SDGs, ensuring to measure how the investment choices contribute positively to the achievement of the 2030 Agenda for Sustainable Investments of the United Nations.
GSR service targets to deliver an effective, synthetic, and clear sustainability reporting with detailed information on ESG metrics, carbon metrics (CO2 emissions), controversies, PAI, as well as a unique alignment to SDGs. The objective of the analysis is to determine positive or negative contributions of the portfolios towards sustainability factors and to determine their sustainability impact.
If you want to learn more about our sustainable investing products and services offering, please contact CRM@FARAD-IM.com.
Head of Portfolio Management
FARAD Investment Management
Junior Portfolio Manager & ESG Analyst