2024 Year in Review

Sustainable investing perspectives

  • Global sustainable investing (SI) funds saw continued net positive inflows in 2024, and global SI assets under management have recovered to reach historical highs. Over 50% of European SI funds performed in the top 50th percentile year to date.
  • Even amid record-breaking temperatures, mitigation progress has been encouraging, with renewable share of electricity generation capacity hitting record highs across the world, but focus on adaptation will also be critical.
  • Elevated geopolitical risk may cause further strain on already tenuous multilateral collaboration. Nevertheless, public capital makes up only 10% of all transition investments, and we continue to emphasize the growing opportunities that focus not on policy direction, but on economic fundamentals, including water, electrification, and energy infrastructure.

This past year was marked by significant global events, with nearly half the world's population voting and expressing dissatisfaction with incumbents in the US, UK, EU, and other regions. Geopolitical tensions rose, notably in the South China Sea and the Middle East, and with Iran. Amid these challenges, central banks began cutting rates, and the S&P 500 hit new highs.

Sustainable investing continued to mature despite political risks and negative headlines. Total AUM increased, global flows remained positive, and real-world outcomes showed steady progress, affirming the robust investment thesis and long-term trends driving sustainable investing.

Perspective

Flows and performance

We compare SI and non-SI funds this year based on net flows, net return performance, and index-based performance for this year and the longer term.

1. Global sustainable funds saw net positive flows, driven by fixed income funds

Global sustainable investing funds saw another year of net positive flows through the end of October 2024. Following global fund trends, fixed income strategies drove the vast majority of inflows, with equity and asset allocation (e.g., “60/40” diversified, multi-asset portfolios) funds experiencing net outflows.

Figure 1: Fixed income drove positive net flows

Global SI funds monthly net asset flows by asset class, Jan - Oct 31, 2024, in USD bn

Source: Morningstar, UBS, data as of October 31, 2024, accessed on December 4, 2024. Universe includes all funds designated as “SI” by Morningstar in the above three broad asset class categories.

We see this as evidence of sustainability-focused investors continuing in line with the broader market: fixed income and money market funds also received over 80% of 2024 net inflows in broad, non-SI strategies globally. Monthly SI net flows were in line with non-SI in seven of 10 months, with the three exceptions being driven by outflows from equity funds.

Figure 2: SI funds flows directionally same as traditional funds in 7 out of 10 months

Monthly global net flows for SI and non-SI funds, Jan - Oct 2024, in USD bn.

Source: Morningstar, UBS, data as of October 31, 2024, accessed on December 4, 2024. Universe includes all funds designated as “SI” by Morningstar in equity, fixed income and allocation funds.

Over 80% of assets and funds classified as SI by Morningstar are domiciled in Europe (including the UK). The United States makes up around 10% of total invested assets under management (AUM), with the rest of the world being the remainder. US-domiciled funds saw a third year of net outflows, primarily driven by equity strategies. Three index-based strategies drove the bulk of the outflows from US equity funds for the entire year.

The sustainable investing market is highly concentrated, with a few funds and ETFs holding most assets. In the US, 316 funds manage over USD 50mn, totaling USD 350bn, but 80% of these assets are in just 73 funds managing over one billion dollars. This concentration risks volatility if large investors change positions and may lead to the liquidation of smaller funds, reducing investable options.

Figure 3: US SI funds flows net negative, despite inflows in fixed income funds

US-domiciled SI funds monthly net asset flows by asset class, Jan - Oct 31, 2024, in USD bn.

Source: Morningstar, UBS, data as of October 31, 2024, accessed on December 4, 2024. Universe includes all funds designated as “SI” by Morningstar and domiciled in the United States in the above three broad asset class categories.

Equity funds continue to dominate the landscape of SI funds across all regions, despite strong net inflows in fixed income funds year to date. Fixed income strategies made up approximately 25% of invested assets and 30% of available funds with more than USD 50mn in AUM globally. Historically, it has been easier for investors to capture sustainability information through equity strategies than fixed income, as well as asset owners' own longer-term investment orientation. We have seen the option set expand for fixed-income SI investors, and would expect this trend to continue.

2. Over half of SI funds performed in the top category quartiles

Performance of SI equity strategies has been mixed in recent quarters and years. As of end of November, 53% of European equity funds (with more than USD 50M in AUM) were in the top half of their peers, as calculated by Morningstar based on net performance (Figure 4). The median performance was the 54th percentile year to date, increasing to 58th percentile in the third quarter.

Figure 4: Over half of European equity funds performed in top half of their categories YTD

% of funds in each Morningstar category performance quartile, as of Nov 31, 2024.

Source: Morningstar, UBS, performance data as of November 31, 2024, accessed on December 4, 2024. Universe includes funds designated as “SI” by Morningstar with more than USD50M AUM. Morningstar-calculated percentage rank in category based on net returns.

Performance of US funds lagged European counterparts this year, with only 43% of funds with more than USD 50M AUM ranking in the top half of their categories (Figure 5). The third quarter was particularly strong, however, with nearly two-thirds of equity funds ending in the top half. The challenged performance this year for US funds likely also partially explains outflows, in addition to asset allocation decisions by investors.

Figure 5: Around 40% of US equity funds performed in top half of their categories YTD

% of funds in each Morningstar category performance quartile, as of Nov 31, 2024.

Source: Morningstar, UBS, performance data as of November 31, 2024, accessed on December 4, 2024. Universe includes funds designated as “SI” by Morningstar with more than USD50M AUM. Morningstar-calculated percentage rank in category based on net returns.

Fixed income funds in both Europe and the United States had similar relative performance in their categories to equity funds. The longer term picture is somewhat different: While the distribution of funds across quartiles has been mostly consistent over the three- and five-year period, the median percentile rank for equity funds over five years was 79th (Europe) and 69th (US).

3. Performance of SI indices varied by approach

At the index level, SI strategies had divergent performance across asset classes and approaches. ESG leader-type strategies met or slightly exceeded their respective benchmark indices (Figure 6). In implementation, investors would have been more likely to experience the outperformance if invested through passive strategies rather than active strategies, as only 33% of active managers (across SI and not SI) beat their benchmark this year, according to CIO research.

Figure 6: Performance of SI indices varied by strategy type

MSCI, Bloomberg, S&P, ICE, and Solactive indices in USD net total return.

Source: Bloomberg, UBS Chief Investment Office (as of November 30, 2024).

Multiple thematic indices continued to lag benchmarks this year, with alternative energy—and clean-tech in particular—ranking toward the bottom. The AI-driven megacap stocks made up a significant majority of the market capitalization of major indices in 2024, and drove performance as well, making it challenging for other sectors focused on longer-term themes to follow.

Fixed income was a different story, with green bonds and multilateral bonds following closely their traditional counterparts.

Investor takeaways:

  • Global SI Fund Flows: Positive global net flows were driven by fixed income funds. Over 80% of assets globally are invested in European-domiciled funds, and over 75% are in equity funds.
  • Performance: Over 50% of European funds ranked in the top half of their peers year to date, compared to 42% of US funds. This underscores the need for selective investment and diversification across different SI strategies and asset classes.

Milestones in sustainability

This was a year of significant records, both positive and negative, as detailed in our companion chart pack report "SI Year in Review."

1. Record emissions and record temperatures

The year consistently surpassed 2023 in daily temperatures, with July 22 being the hottest day on record, according to NASA. The Copernicus Center predicts 2024 will be the warmest year yet, with each month from May 2023 to May 2024 setting a new global temperature record.

Figure 7: Earth’s hottest day recorded on July 22nd

Global average surface temperatures continue inching higher, in degrees Celcius

Source: NCEP Climate Forecast System (CFS), CFS Reanalysis, Climate Reanalyzer, UBS Chief Investment Office (2024).

Climate change costs are rising, with weather-related disasters causing USD 135bn in damages, marking the fifth consecutive year of over USD 100bn in insured losses. Global CO2 emissions are projected to rise by 2% from 2023, driven by fossil fuel-related emissions and South American wildfires, as estimated by the Global Carbon Project at University of Exeter.

2. Record renewable energy generation across China, US and the EU

There was significant progress in renewable energy, with China, the US, and the EU reaching new highs in renewable electricity production at 36%, 54%, and 31%, respectively, in 2Q. This growth is fueled by investments in wind and solar, supported by favorable policies and technological advancements. The demand for electricity is expected to rise owing to AI and electrification, increasing the need for solar, wind, and natural gas. We expect this trend of expanding capacity to continue.

Figure 7: Record renewables generation as share of total electricity

Source: Ember, UBS Chief Investment Office (through November 2024).

3. Labor force participation dropped, gender wage gap worsened slightly

In the US, the labor force participation rate for women reached a record low compared to men, with 57.6% of working-age women participating versus 67.7% of men. Despite improvements, global female labor participation has plateaued. The gender wage gap in the US widened slightly, with women earning 83 cents for every dollar earned by men, down from 84 cents in 2022. The persistence of this trend will be monitored, especially after recent wage increases across various sectors.

Labor force participation gender gap has been dropping but plateaued in %

Source: U.S. Bureau of Labor Statistics, UBS Chief Investment Office (2024).

Investor takeaways:

  • Fundamental trends persist with the materialization of climate change impacts, continued investment in renewables, and labor market dynamics emphasizing the importance of gender diversity. These factors support sustained investor focus on climate risks, renewable energy opportunities, and inclusive workforce strategies.

Elections, COPs, and the way forward

Half the world's population faced national leadership elections this year. While Trump's re-election—and the implications on climate and sustainability progress—dominated headlines, related issues appeared on the agenda in most of the approximately 70 elections held this year. Implications on climate policy are mixed, with potentially encouraging outlooks in the UK and Mexico, for example (the latter of which elected the world's first Environmental Ph.D president), while neutral in Europe, India, and Indonesia. More important than political stances on climate, however, is overall policy risk stemming from the likely continuation of elevated geopolitical risk with protectionism, unresolved conflicts, and weakened coalitions.

This not only casts potential clouds over domestic progress, but furthermore there is a risk that multilateral collaboration would get stuck in geopolitical quagmire. Elements of this were already evident in recent key UN talks in 4Q, including Biodiversity COP16, COP29, and the Intergovernmental Negotiating Committee on Plastics (INC-05).

Only 15% of the countries that promised to submit plans ahead of Biodiversity COP16 did so, and the conference was suspended owing to lost quorum and a failure to achieve consensus, especially on the establishment of a multilateral funding mechanism for nature-related initiatives. Similarly, the UN Plastics Treaty, which aims for through-cycle policies to end plastic pollution—from removal of the most hazardous chemicals to overall production limits—was postponed from the original target of international endorsement last week at INC-05.

On the other hand, COP29 did achieve two notable agreements: the passage of Article 6.4, which aims to operationalise international carbon markets between member countries; and second, developed nations agreed to increase annual climate finance commitments from the $100bn pledged in 2009, to $300bn by 2035. Both of these “wins” are distinctly lukewarm, however, as the new carbon standards continue to lack assessment and policing solutions that are critical to rebuilding credibility in the market, while the increase in climate funding is lackluster once adjusted for inflation (and now includes existing pledges to multilateral development banks by developed nations). We remain far short of the estimated USD 1.3 trillion required for emerging markets to build climate resilience and decarbonization goals.

More important, COP29 shows that the negotiation environment has significantly deteriorated, with Article 6.4 being "forced" through by repositioning of the agenda as a matter to endorse, instead of any meaningful discussion. Emerging markets have voiced increased frustration at deteriorating momentum at multilateral talks, especially the risk of increasing influence from petrostates, which has resulted in the removal of reference to fossil fuel weaning in COP and G20 meetings, as well as block of the Plastics Treaty.

This sets a lethargic backdrop as we await countries’ updates of their respective decarbonization plans (nationally determined contribution, NDCs), which are due next February. A wild card may be China, which has voiced openness toward raising international climate finance contributions on a voluntary basis. Official sources place China’s current contributions at USD 4 bn p.a., compared to the US’s USD 11 bn and USD 30bn from the EU. With China progressing ahead of its decarbonisation targets and dominance (and need to export excess production) in clean tech manufacturing, emerging leadership may be welcome, especially if US participation in global collective action is at risk.

Headline commitments aside, pockets of clearer consensus remain. Among these less contentious areas are water, food, and agriculture, as well as solution-specific initiatives that continued to receive support at COP29, as we anticipated. Examples include international pledges for energy storage and energy grids, as well as increased signatories on the drive to triple nuclear capacity, both of which continue to bring visibility and policy tailwinds to these themes.

Investor takeaways:

  • On international progress, we point out that public investments are estimated to have accounted for only 10% of total global climate funding, according to Climate Policy Initiative. Meanwhile, private capital allocations to the transition continue to grow. For more on President Trump's potential impact, see Sustainable investing Perspectives (Nov 2024).
  • We reiterate our view that, politics and geopolitics aside, the economic case for renewable energy, electrification, and infrastructure remains attractive, with long-term demand visibility. Concerns from Trump’s re-election may be overblown, and we see value in selective segments. See: Power and Resources, and the Energy Transition(s) longer-term investment theme.
  • We remain cautious on voluntary carbon markets progress, as current operationalizing plans may not sufficiently mitigate credibility concerns. We continue to prefer participation in direct solutions, where carbon credits may be one of many monetization channels. See: Sustainable investing in carbon markets.

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