Over the past six years – from just before the pandemic – sustainable and traditional portfolios have delivered similar overall returns but followed very different paths to get there. This divergence has posed challenges for the sustainable investment industry and tested the commitment of sustainability-focused clients.
A key reason for this difference is common biases in sustainable funds, which often overweight fast-growing “growth” companies and small-to-medium-sized firms with a strong focus on innovation.
In the decade before the pandemic, the macroeconomic environment was stable, marked by low growth, low inflation, and low interest rates. During this period, market returns were mainly driven by companies delivering earnings growth, with only limited outperformance of growth stocks over cyclical or “value” stocks. Company size also had minimal impact on relative returns.
This environment favoured sustainable investment strategies. However, since the pandemic, the market landscape has shifted dramatically, with various factors rising and falling in favour rapidly – sometimes within just a few quarters or months.
This shift is due to a rapid series of economic and political shocks, including the pandemic, rising inflation and interest rates that pushed valuations down, the invasion of Ukraine, China’s real estate crisis, the rise of AI, and recently the re-election of an unpredictable U.S. president.
As a result, portfolio and benchmark performance became heavily influenced by factor exposures like value versus growth stocks and large versus small companies.
To adapt to a volatile macroeconomic environment and future-proof our EQ sustainable portfolios, we’ve leveraged the significant growth in investable sustainable companies since launching our first portfolios in 2012.
Over the past three years, this broader universe – spanning more sectors and stages of economic development – has enabled us to collaborate with asset managers to design and launch new sustainable strategies with complementary factor exposures.
By incorporating these strategies and strengthening our risk management, EQ’s sustainable portfolios have become more resilient to future economic and political shocks. We believe this marks the “coming of age” for sustainable investing, especially for EQ’s ambitious sustainable portfolios.
