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Despite improving on a dismal 2022, last year presented its own set of challenges for sustainable investors. Aside from the remarkable performance of the so-called magnificent seven, the US mega-cap technology stocks that together produced a return of 71% (to the end of November), performance was more mixed, particularly for parts of the sustainable universe. As we say goodbye to 2023, below are the Whitechurch Investment Team’s five predictions for the year ahead:

1. 2024 will be a better relative year for sustainable investors.
2023 was a strange year for sustainable portfolios. Like much of the sustainable market, our ethical portfolios are skewed towards more growth orientated sectors; it’s a natural consequence of investing in companies tapping into structural growth trends, such as climate change mitigation. So, in a year where the global growth index outperformed its value counterpart by more than 24%, why did so many sustainable portfolios struggle to outperform their traditional peers? The answer lies largely in the make-up of the index itself, with the magnificent seven accounting for over 37% of the growth index, and the lion’s share of 2023’s performance. Outside of these names, many areas of the market more associated with sustainability themes, such as renewable energy and infrastructure, struggled. However, as we move into 2024, could we see a reversal of fortunes? While the US mega-caps look quite expensive versus historical norms, elsewhere we see real value on offer in the sustainable market, with sectors such as renewable energy infrastructure and global small caps (a rich hunting ground for sustainable investors) looking increasingly attractive for those with a long-term view.

2. ESG will remain highly politicised.
2023 saw ESG caught in the culture war crosshairs. Nowhere was this more evident than the US, with several states even introducing legislation to restrict the use of ESG as an investment tool. With 2024 set to be a historic election year – over two billion voters will go to the polls across 50 countries – ESG, and environmental policy more generally, are likely to be polarising issues once more. The stakes appear highest in the US, with a repeat of the 2020 Biden Trump showdown looking increasingly likely. Given his track record and pro-fossil fuel stance, investors will be asking whether a Trump win could signal the row back of key climate policies, as well as US participation in the Paris Climate Accord. Some commentators have questioned the future of the Inflation Reduction Act (IRA), arguably Biden’s greatest legislative success. Included in the Act are hundreds of billions of dollars for clean energy infrastructure and energy efficiency projects. Could these be under threat during a second Trump term? In theory, yes, but with Republican states receiving almost 80% of the funds made available so far, such a move would likely prove very unpopular with members of his own party.

3. The bond market will look increasingly colourful.
Ten years ago, sustainable investors had limited options in fixed income, and only one colour – green. But as the popularity of ESG has grown and the appetite for labelled bonds has grown, so the bond market has evolved. While green bonds (e.g., a bond used to fund projects with positive environmental and/or climate benefits) will remain popular, we are also likely to see an uptick in issuance of other colours, including blue (raising capital for projects aiming to protect and conserve marine ecosystems) and orange (raising capital for projects that promote gender equality) bonds. Social bonds – which fund social impact projects such as affordable housing – are also a growing part of the labelled bond universe. The emergence of more colours  a win-win, both for the projects they fund and for investors looking for diversification within their fixed income allocation. If inflation continues its downward trajectory and investor appetite for bonds continues, we could see a record year for new issuance in 2024.

4. Biodiversity to hit the mainstream.
While addressing climate change has long been a focus for sustainable investors, other environmental challenges have received less attention. As we enter 2024, could biodiversity become more of a focal point? Almost half of global gross domestic product, an estimated $44 trillion, relies on nature, but a combination of climate change, pollution and deforestation are putting ever increasing pressure on the natural world. Back in 2020, 190 countries came together at the United Nations Biodiversity Summit (COP15) to address this issue, committing to restore and conserve 30% of ecosystems by 2030. For investors, however, defining the impact of an investment on biodiversity remains challenging. In September 2023, the Taskforce on Nature-related Financial Disclosures (TNFD) published its final framework to help firms manage the risks associated with biodiversity loss. Designed to be similar in structure to the widely adopted TCFD (Taskforce for Climate-related Financial Disclosures) framework, the adoption of TNFD should provide investors with some much-needed clarity.

5. 2024 to be the hottest year on record.
As I write this blog, 2023 has just been confirmed as the hottest year on record. Driven by human-caused climate change and supercharged by the El Niño weather phenomenon, last year was about 1.48oC warmer than the long-term pre-industrial average and just shy of the symbolic 1.5oC temperature threshold. There are signs that 2024 could be warmer still. El Niño, the natural weather event which typically leads to a surge in global temperatures, is likely to strengthen further as we move through the first half of 2024, bringing with it more extreme weather events. It is a timely reminder that our industry, as well as the wider economy, needs to move much faster in its efforts to decarbonise.

For information on Sustainable Investments, please visit our website www.whitechurch.co.uk or contact a member of our Business Development Team on:
Email: dfm@whitechurch.co.uk
Phone: 0117 452 1207

Read the full PDF here

Daniel Say

FP3678.17.01.2024

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