General Insights [[{“value”:” 

2023 was a challenging year for impact and sustainable investment strategies. The MSCI ACWI Sustainable Impact Index underperformed the MSCI World Index by about 2,000 bps. This poor performance was tied to severe multiple compression in several high valuation stocks with obviously impactful businesses. Since impact can be hard to find, the largest impact funds tend to crowd into the same obviously impactful businesses and therefore suffered similar performance woes as the index. Startlingly, 25 stocks are commonly owned by at least one-third of the 15 largest actively managed “Sustainable” or “Impact” funds, according to eVestment. In Lyrical’s Global Impact Value Equity Strategy (GIVES), we do not own any of those obvious impact stocks and we avoided much of the performance pain suffered in 2023.
There is a lot to like about obviously impactful businesses; not only do they improve the world, they also typically benefit from secular growth. However, overpaying for any business, even an impactful one, should eventually lead to poor returns. We believe prime examples of this are the popular and expensive alternative energy companies, including Enphase and SolarEdge.
The alternative energy companies had attractive fundamentals, but they were expensive. In 2023, these companies had fantastic earnings growth of 28%, handily beating the 15% growth of the electrification suppliers, as you can see on the left side of the chart below. However, the alternative energy companies had an average return of -14%. Their problem was not growth; it was valuation. As investors questioned the long-term pace of renewables adoption, this group of companies saw a de-rating of -34% in 2023, as you can see on the right side. Even after this multiple decline, these stocks still ended the year at a lofty 26x earnings.
Impact companies can be found without splurging on high valuations. Consider electrical suppliers providing the materials needed to support electrification. Electrical suppliers grew earnings by a strong, albeit slower 15%, but they started the year at a lower valuation, which allowed for multiple expansion of 28% during the year and a positive average return of 32%.”}]]