Artificial intelligence (AI) was the big player in the top sustainable funds of last year, with nine of the ten best performers having technology company NVIDIA in their ten largest holdings – making up 8.8% of the portfolios on average. NVIDIA’s focus on AI has boosted it to a market capitalisation of $1.48trn at the time of writing.
Morningstar Direct figures, based on total returns in 2023 for sustainable funds available in UK, put Amundi MSCI Semiconductors ESG Screened UCITS ETF at the top of the list with a return of 68% in the year to 31 December 2023. It’s biggest holding is NVIDIA at 26.5%, followed by Taiwan Semiconductors and semiconductor company Broadcom Inc – at 10.3% and 10% respectively.
| Fund Name | Return 1.1.23 to 31.12.23 | Fund Size (GBP) | Fund Size Date | ISIN | Category | Inception Date |
|---|---|---|---|---|---|---|
| Amundi MSCI Semiconductors ESG Screened UCITS ETF | 68.00% | 126,804,812 | 18-Jan-24 | LU1900066033 | Sector Equity Technology | 21-Feb-19 |
| JSS Sustainable Equity – Tech Disruptors | 65.19% | 221,683,606 | 29-Dec-23 | LU1842717883 | Other Equity | 14-May-21 |
| VanEck Semiconductor UCITS ETF | 63.38% | 990,494,874 | 18-Jan-24 | IE00BMC38736 | Sector Equity Technology | 1-Dec-20 |
| iShares MSCI Global Semiconductors UCITS ETF | 54.87% | 537,413,422 | 18-Jan-24 | IE000I8KRLL9 | Sector Equity Technology | 5-Aug-21 |
| iShares MSCI World Information Technology Sector ESG UCITS ETF | 50.70% | 317,537,266 | 18-Jan-24 | IE00BJ5JNY98 | Sector Equity Technology | 16-Oct-19 |
| TCW Global Artificial Intelligence Sustainable Equity Fund | 46.93% | 17,473,681 | 18-Jan-24 | LU1848748650 | Other Equity | 13-Aug-18 |
| Invesco Markets II plc – Invesco NASDAQ-100 ESG UCITS ETF | 46.30% | 740,269,496 | 18-Jan-24 | IE000COQKPO9 | US Large-Cap Growth Equity | 25-Oct-21 |
| JSS Sustainable Equity – Tech Disruptors | 44.58% | 221,683,606 | 29-Dec-23 | LU1752458551 | Sector Equity Technology | 31-May-18 |
| TCW Global Artificial Intelligence Sustainable Equity Fund | 39.93% | 17,473,682 | 18-Jan-24 | LU1848748734 | Sector Equity Technology | 30-Jul-18 |
| Man GLG RI Global Sustainable Growth | 37.40% | 5,882,170 | 18-Jan-24 | IE00BNXH7B80 | Other Equity | 4-Nov-21 |
Source: Morningstar Direct
The success is thanks to the AI “boom” with stocks on the semiconductor side or the operating system side particularly benefitting, explained Hortense Bioy, global director of sustainability research for Morningstar.
Louis Selby, investment research associate at Square Mile Investment Consulting and Research said individual stocks have performed well due to tech giants investing heavily in AI technologies. Looking at the broader drivers of growth in tech he said the main drivers were continued digitalisation, technology advancements and the sector having significant barriers to entry which further cemented the leaders’ positions in the market.
The outlier of the top ten funds was Man GLG RI Global Sustainable Growth fund, which came in 10th place returning 37.4%. The fund is 34% invested in technology, 26% in healthcare and 11% in financial services and NVIDIA does not appear in its top holdings.
Selby commented on the fund’s inclusion of market leaders: “[The fund] has a more quality focused approach as it owns market leaders such as Microsoft Corp, S&P Global, Adobe etc, which performed +65%, +20%, and +70% respectively. These three make up the two, three and four of the top four holdings, perhaps explaining the good performance over the year.”
| Fund Name | Return 1.1.23 to 31.12.23 | Fund Size (GBP) | Fund Size Date | ISIN | Category | Inception Date |
|---|---|---|---|---|---|---|
| Global X Hydrogen UCITS ETF | -40.21% | 3,068,151 | 18-Jan-24 | IE0002RPS3K2 | Other Equity | 7-Feb-22 |
| Global X Solar UCITS ETF | -37.23% | 2,430,449 | 18-Jan-24 | IE000XD7KCJ7 | Sector Equity Alternative Energy | 15-Feb-22 |
| Global X China Clean Energy UCITS ETF | -36.53% | 1,699,057 | 18-Jan-24 | IE000TMA7T63 | Sector Equity Alternative Energy | 18-Jan-22 |
| Invesco Solar Energy UCITS ETF | -31.03% | 46,800,956 | 18-Jan-24 | IE00BM8QRZ79 | Sector Equity Alternative Energy | 2-Aug-21 |
| VanEck Hydrogen Economy UCITS ETF | -28.89% | 58,279,997 | 18-Jan-24 | IE00BMDH1538 | Other Equity | 26-Mar-21 |
| BlackRock Global Funds – China Impact Fund | -28.67% | 16,124,821 | 18-Jan-24 | LU2048600170 | China Equity | 9-Oct-19 |
| Mirae Asset Global Discovery Fund – China ESG Sector Leader Equity Fund | -28.65% | 1,773,049 | 30-Nov-23 | LU0336295836 | China Equity | 28-Oct-09 |
| Luxembourg Selection Fund Active Solar | -28.27% | 151,608,129 | 18-Jan-24 | LU1308789038 | Other Equity | 9-Dec-15 |
| Luxembourg Selection Fund Active Solar | -28.13% | 151,608,129 | 18-Jan-24 | LU0377291322 | Sector Equity Alternative Energy | 1-Sep-08 |
| Global X CleanTech UCITS ETF | -27.38% | 1,605,853 | 18-Jan-24 | IE00BMH5YL08 | Sector Equity Ecology | 16-Nov-21 |
Source: Morningstar Direct
Clean energy hurting
Meanwhile, the worst-performing sustainable funds of 2023 tell the story of the multiple headwinds for clean energy last year, and the double challenges for China. At the bottom of the list Global X Hydrogen UCITS ETF returned -40.21% in 2023 and seven other funds at this end of the performance spectrum were also clean energy. The remaining two were China equity funds.
Bioy explained clean energy funds invest in companies particularly vulnerable to higher inflation rates and interest rates.
“Pure growth companies and growth companies tend to be affected by interest rates more than value companies and also they suffered from inflation which impacted the cost of materials in their supply chains,” she said.
China
Bioy noted the supply chain issues these companies suffered would have been linked to the legacy of disruption Covid-19 left in China.
Looking at the two China equity funds on the list, however, she said they would have suffered because the Chinese economy is not currently doing well. She cited deflation and reduced policy to support the economy as contributing factors for this.
As a result, some companies are on the slow route to diversifying their supply chains.
“For renewable energy stocks, when we talk about supply chain issues that’s because of China and that’s partly the reason why some companies are trying to diversify their supply chains. It is also for geopolitical reasons. They are trying to reduce their dependence on China but that takes time,” she said.
For Hydrogen in particular, Selby said supplies have been struggling for many reasons, including the cost of power to extract hydrogen increasing drastically due to the Ukraine war.
He added clean energy funds were also up against a reducing interest in decarbonisation.
The backlash
The ESG backlash was a huge story in sustainable finance in 2023, but Bioy said although it would affect flows, it did not contribute to the performance of either the best or worst sustainable funds of the year.
“For the ones at the bottom which performed badly, it is not because of the backlash. If you look at the Inflation Reduction Act in the US you see there are long-term trends that would support this sector and these themes, it’s just that there have been short-term headwinds which affected performance. The long-term drivers for these trends, like solar and renewable energy in general, are still there.”
Selby pointed to a shift towards more defensive, value-oriented stocks and said while this could be partly explained by geopolitical uncertainty, energy security, high interest rates, and high inflation, the trend has been exaggerated by increasing politicisation of ESG, especially in the US.
Sustainable v screened
ESG Clarity was told by one fund manager if a fund performed well in 2023 it probably is not that genuinely sustainable.
In Selby’s view there need be no conflict between the two things – the top performing funds are sustainable, they just happen to be invested in sectors and stocks that have enjoyed several tailwinds.
“Although semiconductors and AI may not be high-impact activities that were synonymous with the growth in late 2010s and early 2020s, they still do have many sustainability benefits.
“For example, semiconductors have seen significant growths in resource efficiencies and AI has helped foster economic growth and improve workplace productivity,” he said.
Bioy was less enthusiastic about the sustainable label for some of the funds. Despite all 20 funds looked at here falling into the category of sustainable according to Morningstar’s criteria, she qualified the inclusion of the ETFs returning 46% and more last year.
“I am not completely sure about the ESG elements in those ETFs. We see some ETFs with very, very light ESG screens and screens that are not even relevant,” she commented, noting the example of some semiconductor funds screening for tobacco or controversial weapons where carbon footprint and carbon intensity would be more suitable things to look at for the sector.
She said Morningstar is considering how it uses the sustainable label for these types of funds and may make changes.