5 Top-Performing ESG Funds in 2024

The stock market’s recent decline pulled many big-cap funds lower, including some of this year’s top-performing sustainable-investing funds. Yet the funds’ managers were sanguine about the outlook for sustainability-minded companies in interviews before the market’s dive in early August.

Gregory Adams, manager of Alger Responsible Investing SPEGX, predicted the market “could broaden out so there’s a healthier aspect for the rest of the year.” Adams expects environmental issues to dominate attention for the next five to 10 years as the sustainability theme that “people think about first.”

Unlike in Europe, “here in the US, these are hot-button political issues,” says Adams. And yet, “when push comes to shove, most company managements want to be more energy-efficient. It ultimately makes companies better, more resilient, and more profitable.”

Katherine Collins, manager for Putnam Sustainable Leader PNOPX, notes: “Sustainability issues are more and more important to long-term company success, and they’re structurally still underresearched. That’s a great recipe” for investors.

Companies and investors both are growing more sophisticated about what they’re looking for in sustainable investments and practices. “The rhetoric is loud, but what shines through with a thoughtful strategy should endure the test of time and whims of policy,” says Collins. “It’s the age of refinement.”

Joe Reiland, who oversees American Century Sustainable Growth ETF ESGY, expects “a long roadway” for further company adoption and gains from decarbonization, renewable energy, electrification, automation, and water infrastructure. “There’s a lot to focus on right now.”

To compile our list of top performers for the first half, we looked at sustainable funds, or funds that use environmental, social, and corporate governance metrics to reduce risk and increase opportunity, and/or use sustainable approaches.

For this article, we aggregated US-domiciled large-cap sustainable funds. We then ranked these funds by total return in the first half of 2024. For comparison purposes, we include returns for the Morningstar US Sustainability Index and the SPDR S&P 500 ETF Trust SPY. The average big-cap sustainable fund returned 9.9% during the first half, according to Morningstar Sustainalytics.

Top Five Sustainable Funds as of Second-Quarter 2024

We provide details from five top funds below. We conducted interviews with managers of the top three funds.

1. Putnam Sustainable Leaders PNOPX

• Morningstar Rating: 3 stars
• Carbon Risk Level Classification: Low Risk
• Fund Size: $6.5 billion

This fund seeks long-term capital appreciation by using a bottom-up fundamental stock-picking approach and a forward-looking sustainability analysis. This fund encompasses companies that have demonstrated leadership in sustainability issues and is managed by Katherine Collins and Stephanie Dobson. In an interview, Collins, who is also Putnam’s head of sustainable investing, said the fund seeks companies that have transparent disclosures and a mission that aligns with a commitment to sustainable business practices. This fund’s contributing leaders in the first half of 2024 were Nvidia NVDA, Constellation Energy CEG, Boston Scientific BSX, Chipotle Mexican Grill CMG and Walmart WMT.

According to Morningstar Manager Research, Putnam Sustainable Leaders shows 21.3% involvement in carbon solutions, surpassing the 16.0% average involvement of its peers in the large-growth Morningstar Category. Carbon solutions include products and services related to renewable energy, energy efficiency, green buildings, green transportation, and so on. The fund has little exposure (1.37%) to companies with high or severe controversies that create some degree of financial risk for the company.

2. Alger Responsible Investing SPEGX

• Morningstar Rating: 3 stars
• Carbon Risk Level Classification: Low Risk
• Fund Size: $96.2 million

Alger invests in growth equity securities with the goal of long-term capital appreciation. It uses a quantitative, bottom-up stock-picking approach. It identifies securities rated as having positive ESG practices. In an interview, Gregory S. Adams, who is Alger’s director of quantitative & risk management, said that Alger takes into account the company’s energy usage, carbon footprint, and diversity of board management, among other factors. Alger meets with companies when there are identified ESG risk issues. In the first half, Microsoft MSFT and Nvidia helped buoy the fund, while Lululemon LULU and Tesla TSLA detracted from performance.

One key area of strength for Alger Responsible Investing is its low Morningstar Portfolio Carbon Risk Score of 3.18 and very low fossil fuel exposure over the past 12 months, which earns it the Morningstar Low Carbon Designation. Meanwhile, the fund’s 20.7% involvement in carbon solutions surpasses the 16.0% average involvement of its peers in the large-growth category, says Morningstar Manager Research.

3. American Century Sustainable Growth ETF ESGY

• Morningstar Rating: 4 stars
• Carbon Risk Level Classification: Low Risk
• Fund Size: $17.6 million

This fund looks for high-quality companies with strong and improving cash flows, earnings, and profit margins that trade at attractive valuations. It owns large-cap companies that are socially conscious and prioritize environmental issues. Joe Reiland, vice president and senior portfolio manager for American Century Investments, says he looks for companies that show sustainable business improvement and sustainability leadership. The fund utilizes both fundamental and quantitative analysis to choose securities. Reiland says “quantitative research has the advantage of breadth while fundamental research has advantage of depth and is looking forward. Pair it, and it’s a nice complement.” Examples of companies that buoyed performance for this fund in the first half include Nvidia and Novo Nordisk NVO.

The fund has a Morningstar Portfolio Carbon Risk Score of 2.54 and very low fossil fuel exposure over the past 12 months, which earns it the Morningstar Low Carbon Designation. However, the fund also has significant exposure (15.58%) to companies with high or severe controversies according to Morningstar Manager Research.

4. Invesco ESG Nasdaq100 ETF QQMG

• Morningstar Rating: None
• Carbon Risk Level Classification: Low Risk
• Fund Size: $44.7 million

Per the fund’s prospectus, at least 90% of total assets must be in the Nasdaq-100 ESG Index. Each company’s ESG Risk Rating score must meet requirements for inclusion in the index. The company must be compliant with the United Nations Global Compact principles. This fund also does negative screenings to exclude companies involved in alcohol, cannabis, tobacco, gambling, controversial weapons, nuclear power, and oil and gas. The top three holdings for this fund include Apple AAPL, Microsoft, Nvidia.

According to Morningstar Manager Research, the fund has a low Morningstar Portfolio Carbon Risk Score of 2.74 and very low fossil fuel exposure over the past 12 months. Invesco ESG Nasdaq 100 ETF also shows 31.4% involvement in carbon solutions, surpassing the 16.0% average involvement of its peers in the large-growth category. The fund has a modest level of exposure (6.13%) to companies with high or severe controversies.

5. BlackRock Sustainable US Growth Equity BSGKX

• Morningstar Rating: None
• Carbon Risk Level Classification: Low Risk
• Fund Size: $5 million

This fund seeks to maximize total return while considering ESG characteristics, climate risk exposure, and climate opportunities. It invests in securities included in the Russell 1000 Growth Index or with similar market capitalizations. The top 10 holdings constitute 69.9% of the fund’s assets. The top three holdings are Nvidia, Microsoft, and Amazon.

The fund has a low Morningstar Portfolio Carbon Risk Score of 2.39 and very low fossil fuel exposure over the past 12 months, which earns it the Morningstar Low Carbon Designation. Its 21.0% involvement in carbon solutions surpasses the 16.0% average involvement of its peers in the large-growth category. By prospectus, the fund avoids controversial weapons, tobacco, thermal coal, and small arms, or companies’ international norms, including the U.N. Global Compact or the Universal Declaration of Human Rights. Some 11.48% of the fund is in companies with high or severe controversies, according to Morningstar Manager Research.

What’s Next for ESG Funds?

Hortense Bioy, head of sustainable investing research for Morningstar Sustainalytics, sees the macro environment improving if interest rates are cut, lifting ESG funds. That should also help renewable energy funds, which have been dependent on interest rates, Bioy said in an interview.

Meanwhile, with respect to geopolitical risks, the US election may affect performance for the remainder of the year, says Bioy. A Donald Trump victory may change investments in clean energy and the Inflation Reduction Act, which has been a big driver of investments in renewable energy. A Trump victory may also encourage policies in favor of fossil fuels, which have been blamed for global warming.

A Look at the Largest ESG Funds

Here is the performance of the largest big-cap sustainable diversified equity funds in the US. We ranked our universe by fund size and, as above, for comparison purposes, we include returns for the Morningstar US Sustainability Index and the SPDR S&P 500 ETF Trust. According to Morningstar Sustainalytics, the average big-cap sustainable fund returned 9.9% during the first half, 17.2% for the 12 months ended June, and 16.4% annualized for the three-year period.

How The Largest US Sustainable Equity Funds Did in the First Half