For a while we have argued that stocks or themes with a sustainable angle are likely to outperform broader equity markets. This, in our view, is not only driven by the growing share of assets that is being allocated towards them but more fundamentally because the need to improve sustainability is becoming ever clearer. This in turn is likely to support the outlook for companies seen to aid the sustainable agenda while simultaneously putting pressure on the outlook for those that don’t. This report summarises our approach towards sustainable thematic investing as well as the performance that we have achieved by ranking our different themes and selecting stocks of the most attractive ones.

 Methodology: We track 17 different investment themes that, in our view, can be connected to one or more of the United Nations’ Sustainable Development Goals (SDGs). As all of our themes are sustainable in nature, we do not have to worry about exclusion but rather focus our attention on identifying the themes that are likely to outperform. We identify relative attractiveness by comparing themes on their “Quality” (e.g. cash flow returns) and “Momentum” (e.g. earnings revision and share price change) characteristics. Of the themes ranked in the top quartile. we select those stocks that individually score above average on Quality and Momentum and track the performance of this portfolio of companies. In addition to this quantitative approach, we also provide investors with a more qualitative list of stocks that are made up of analyst-driven ideas.

 Performance Review: – Our quantitative approach based on above-average scoring stocks from our top four ranked themes performed well last month considering that the group outperformed the MSCI AC World index by 178 bps. Since we launched this approach in November 2019, our approach has generated an ‘alpha’ of 2074 bps relative to the MSCI ACWI.

– Our qualitative analyst-driven list of stocks (the so-called ‘Ideas with Impact’) also performed well last month as this list outperformed the MSCI AC World index by 113bps thereby lifting the alpha achieved since launch in November 2019 to 1764bps.

 Ranking our themes: Based on current quality and momentum scores, we see no change to our top quartile list of themes. Industrial energy efficiency, Healthy Living, Automation and Building energy efficiency continue to be more attractive than our other 13 themes. Themes that have the least attractive mix of quality and momentum areHydrogen, Wind, Solar, and Green Infrastructure.

 Education is getting more out of favor: The theme of education is highly relevant as far as the SDGs is concerned (SDG4 specifically deals with it); however, from an investment point of view, it has been a very difficult theme. In April 2020 Education ranked first, something which we believe was driven by the pandemic-induced growing need for ‘home-schooling’ services. However, since then the relative ranking has steadily declined. During the past month the theme, and especially the Chinese companies, got hit badly over worries regarding tightening regulation in China. The theme has been the weakest performer since we started in 2019.

 Renewable-recovery? We have frequently pointed out that renewable companies appeared expensive, something which we believed would work as a headwind in relation to share price performance. While the space did underperform most themes earlier this year, we note that during the past 2 months solar and energy storage companies in particular have started to outperform again. This may continue as the release of the Sixth Assessment Report by the IPCC earlier this month is likely to increase the attention on needed investments in renewable or decarbonizing themes.