After holding their own in the fourth quarter, sustainable equity funds finished 2020 with a clear performance advantage relative to traditional equity funds. Sustainable funds are those that emphasize the use of environmental, social, and governance criteria to generate financial return and broader societal impact. For most of the year, the kinds of stocks that sustainable equity funds prefer--those of companies with better ESG profiles and that are aligned with the transition to a low-carbon economy--outperformed.
In conventional terms, many of those tend to be quality-growth stocks. The approval of COVID-19 vaccines late in the year spurred a rally among cyclical value and traditional energy stocks, which to that point had lagged severely during the pandemic. As a result, sustainable equity funds performed on par with their traditional peers in the fourth quarter.