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ESG vs non ESG portfolios: sustainable investing as the real winner of the new inflationary framework

In this uncertain market framework, last macroeconomic data releases seems providing encouraging signals that central banks are succeeding in slowly easing inflationary pressure, despite still not leading to severe negative impacts on economy leading indicators and labor market. After a tremendous 2022 for major markets and also for sustainable investing, the investment managers could face a more favorable macroeconomic environment to re-enter among equity and bond markets with an enhanced ESG awareness and with an improved market recognition of company ESG efforts.

2022 has proved to be a year of great volatility on markets and sector rotation into equity strategies, led also by the speed of the major central banks interest hikes to face the sky-rocketing inflation. 2023 started with a quick (partial) recovery among equity markets, thanks to decelerating inflation and the hope of a monetary normalization, but also with economic slowdown, which are leading into technical recessions in the major developed countries.

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. However, worth to mention that 2022 winners were the energy sectors and the commodity-linked strategies, while the rate hikes seriously affected the market valuations of the growth-biased energy-transition companies, which represented the majority of the major ESG strategies available in the market.

In this context, empirical evidence demonstrates that the main ESG equities indexes have outperformed the corresponding non-EGS benchmarks over the last five years and on YTD basis. As an example, MSCI World ESG Leaders index has outperformed the traditional MSCI World by approx. 0,80% per annum since July 2018, and the ESG over-return is even more pronounced within European indexes, with MSCI Europe ESG Leaders having a +1,18% annualized higher return than MSCI Europe. The bond market has marked again a slight relative outperformance of ESG indexes in 2023. On the other hand, in the five year time frame, it is worth to highlight as European bond market has converged to ESG standards in a more pronounced way, recording a substantial overlap in returns among ESG and standard pan-European indexes, while globally speaking there is still a pronounced gap in ESG spread among major bond markets, and it resulted into a slight underperformance of sustainable index of approx. 0,46% per annum (Source: Bloomberg, end of June 2023 data).

Figure 1 : Equity ESG vs Non-ESG Indexes

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Figure 2 : Bond ESG vs Non-ESG Indexes

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.

Gianluca D’Alessio

Head of Portfolio Management

FARAD I.M.

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