The Takeaway
In calendar-year 2024, 45% (60/133) of Morningstar Indexes’ sustainability benchmarks outperformed their non-ESG equivalents, up from 44% outperformance in 2023 and 27% in 2022.
Climate and net-zero-aligned indexes had a very strong year, with 77% (20/26) outperforming their broad-based benchmarks. Tilts away from the energy sector and toward technology and consumer cyclicals were the main drivers of the outperformance.
Morningstar Indexes’ flagship climate benchmark series, the Morningstar Low Carbon Transition Leaders (LCTL) Indexes had a banner year, with 89% (8/9) beating their benchmarks. Despite overweighting energy and underweighting technology, the Morningstar Global LCTL Index outperformed its benchmark by 4.1% in 2024.
The performance of sustainability indexes varied widely in 2024. On the one hand, climate indexes had a banner year, powered by exposure to Nvidia, Tesla, and other members of the “Magnificent Seven.” On the other hand, impact-aligned indexes—which generally select and overweight companies that contribute positively to the planet or society—struggled relative to the broad market.
Concentration in global equity market leadership in 2024 led to uneven performance across sustainability indexes. Many of these indexes use a best-in-class selection methodology, meaning they include only the highest-rated stocks based on ESG risk within each sector. Since recent top market performers have been concentrated in just a few sectors, this approach often resulted in missing out on certain high-return securities. In these cases, the underperformance of sustainability indexes was driven more by idiosyncratic risk than systematic risk.
Indexes using ESG risk-focused security selection or tilting weight mechanisms slightly underperformed the broad equity market in 2024. Climate indexes, which use similar mechanisms but largely utilize emissions intensity or forward-looking climate metrics, largely outperformed the market in 2024. Similar to 2023, relative over or underperformance in 2024 was primarily driven by security selection.
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