Sustainable Bottom Line: Focused sustainable US equity funds gained 12.9% in 2025, lower than the previous two years but significantly offsetting 2022’s decline of 20.7%.
Notes of Explanation: Categories arrayed from large-cap funds to small-cap funds, along with their style variations, i.e. growth, blend and value. Sources: Morningstar, Sustainable Research and Analysis LLC.
Observations:
• In 2025, all major asset classes delivered positive returns for the first time since the pandemic, despite pronounced volatility early in the year driven by trade tensions and tariffs; U.S. equities rebounded sharply, with the S&P 500 finishing up 17.9% (total return), propelled by a narrow group of AI-linked mega-caps, rich valuations, and strong second-half momentum tied to fiscal and monetary stimulus, while sector leadership favored Communication Services and Technology. Mid-cap and smaller-cap stocks lagged. Bonds recorded their best year in five, with the Bloomberg U.S. Aggregate Bond Index up 7.3% as the Federal Reserve cut rates and yields declined, and credit markets remained resilient. International equities materially outperformed U.S. markets, aided by a roughly 12% decline in the U.S. dollar, with developed and emerging markets both posting gains above 30%. Focused sustainable mutual funds and ETFs also performed strongly, averaging a 15.7% return across more than 1,100 funds, extending a robust three-year performance streak across U.S. equity, international equity, and taxable bond segments. That said, one has to question the longevity of the three-year winning streak, given, in part, the narrow gains attributable to the market’s AI craze, rich valuations, lingering inflation concerns and geopolitical risks.
• Focused sustainable US equity funds, including large, mid-cap and small-cap funds, a total of 310 funds/share classes with $220.5 billion in assets under management, recorded an average gain of 12.9%. Although lower, this was the third consecutive year during which sustainable US equity funds posted double digit returns, significantly offsetting the 20.7% decline recorded in 2022.
• Returns varied across market capitalization segments, ranging from a low of 4.5%, on average, registered by Small Blend funds, to an average high of 15.4% achieved by Large Blend funds, but the relative average returns recorded by focused sustainable funds across the major growth and value style variations are distorted when compared to the 2025 total returns posted by large and small-cap growth and value stocks in particular. For example, the S&P 500 Growth Index was up 22.18% versus the S&P 500 Value Index that was up a more modest 13.19%. While not as pronounced, the S&P SmallCap 600 Growth Index was up 6.7% as compared to 5.37% recorded by its value counterpart. While these relationships also played out across the universe of the significantly larger conventional mutual funds and ETFs, both in number and size, they didn’t hold up across the corresponding categories of focused sustainable funds.
• In the case of small-cap funds, which have since the start of the year been beating their large-cap counterparts, their absolute and relative returns for 2025 are skewed due to the make-up of the three style categories that are populated by a small number of funds/share classes (13 funds/23 share classes in total, excluding one thematic fund) and the outperformance or trailing performance of a small number of funds. For example, the Small Blend category is comprised of 10 funds (17 share classes), including the Calvert Small-cap Fund with its four share classes that registered an average -6.44% return in 2025. The fund, which emphasizes earnings quality and downside risk mitigation, trailed its benchmark by a wide margin due to negative stock selection across the portfolio as investors favored speculative momentum stocks and dragged down the investment category’s average. While the Large cap funds segment is considerably larger, consisting of 99 funds (excluding thematic funds), the average performance of the Large Growth Segment was also hamstrung by the trailing performance of a limited number of funds. For example, the large-cap Brown Advisory Sustainable Growth Fund, which pursues a quality-growth mandate, added an average of 3.33% relative to the momentum driven large cap stocks that posted a gain of 22.18%, per the S&P 500 Growth Index.
• A listing of the top five performing funds in 2025 in each of the core style categories is provided below. The listing also identifies funds that have been assigned the highest “A” fund quality ratings by Sustainable Research and Analysis. Funds in the leading “A” level category are considered leading candidates to populate core positions within diversified portfolios consisting entirely or partially of sustainable funds or on a stand-alone basis.
*As used here, a core position refers to the central or foundational investments in a diversified portfolio that balances stability and growth over the long-term. Core positions often comprise diversified, low-cost assets such as index funds, exchange-traded funds (ETFs), or blue-chip stocks. They act as the anchor of a portfolio, ensuring it remains resilient during market fluctuations. While exposures will vary to reflect an investor’s goals and objectives, core positions would include funds or stocks that provide exposure to the following diversified investment categories: large-cap U.S. companies, mid-cap and small-cap U.S. companies, international stocks and emerging market stocks as well as intermediate investment grade corporate and government bonds.
Notes of Explanation: Funds, including mutual funds and ETFs, in each category listed based on their 12-month total return performance to December 31, 2025. For mutual funds with multiple share classes, only the mutual fund share class posting the highest return is listed. Thematic funds have been excluded. In the case of mutual funds, AUM$ applies to the share class. #Fund assigned a Fund Quality Rating of “A” by Sustainable Research and Analysis. Sources: Morningstar and Sustainable Research and Analysis.
SRA quality ratings-An Explanation
Fund quality ratings are evaluated and assigned to funds within their designated investment category/segment. Fund quality ratings are expressed along a five-point scale that runs from A (highest quality) to E (lowest quality).
Ratings combine qualitative and quantitative elements and are derived based on an evaluation of the five factors. The first three, which are evaluated qualitatively, are: (a) Management company. The fund should be offered and managed by an established firm with a positive reputation, to ensure effective fund operations and instill trust and confidence in the organization. (b) Years in operation. The fund should be in operation for at least three years and managed pursuant to the same investment strategy—to provide a sufficiently long but not excessively long view against which to evaluate the fund’s operations, strategy, and performance. (c) Fund size. The fund’s total net assets should exceed $30 million—so that it may be managed more efficiently and to provide some protection against the fund’s early liquidation or closure. Some exceptions may apply in the case of funds offered by larger, established firms. The next two factors, which are evaluated quantitatively via a scoring methodology, are: (d) Total returns. The fund’s performance results, achieved by adhering to a relatively consistent investment approach, are evaluated relative to an appropriate securities market index over a one year, three year and five-year intervals, and (e) Expense ratio. The fund’s expense ratio is evaluated relative to other funds in the same investment category/segment.
One evaluated and scored, fund quality ratings are distributed as follows: Top 15%=A, next 20%=B, next 30%=C, next 20%=D and final 15%=E.
NR indicates that a rating has not been assigned to the fund as it employs leverage, it falls outside the designated investment category, or it fails to meet one of the minimum requirements.
Funds with quality ratings in category levels “A” and “B” should be considered leading and secondary candidates for positions within diversified portfolios consisting entirely or partially of sustainable funds or on a stand-alone basis. Leading and secondary candidates should be evaluated relative to an investor’s sustainability preferences. In the case of thematic funds, such as renewable energy funds, investors should keep in mind that some funds are narrowly focused, for example, funds investing in solar or wind energy, while others are broader based, for example, renewable energy or energy transition.
Fund selections should be consistent with an investor’s financial goal and objectives and sustainability preferences.
Updated 1-17-2026
