Sustainable Bottom Line: Within a field of some 30 index suppliers used by labeled sustainable index tracking mutual funds and ETFs, three index providers dominate.
Notes of Explanation: All Others category includes 15 index providers using indices that generally apply to only one fund. Data as of May 31, 2026. Sources: Morningstar and Sustainable Research and Analysis LLC
Observations:
• The SpaceX IPO has focused attention in recent weeks on the varying approaches and methodologies employed by securities market index providers regarding the inclusion of new listings. Thematic or narrowly based as well as broad based index providers such as Nasdaq and FTSE Russell modified their approaches to accommodate the inclusion of SpaceX shortly after its IPO. Nasdaq now adds to its indices after just 15 days of trading with newly listed companies that rank in the top 40 of the Nasdaq-100 Index by market capitalization while the FTSE USA Index include newly listed companies after just five days of public trading rather than the September or December 2026 reconstitution. At the same time, MSCI did not alter its inclusion policies while S&P Dow Jones decided to retain its methodological approach. It continues to require companies to trade for a year and report profits across a span of four quarters. An article posted last week, One IPO, Two Universes: What the SpaceX IPO Means for Sustainable Broad-Based Index Fund Investors, covered the issues associated with the inclusion or exclusion of SpaceX and its impact on some of the leading broad based sustainable indices and funds that seek to replicate their performance. These include the FTSE US Choice Index (used by the $26.2 billion Vanguard Social Index Fund (VFTAX and VFTNA)), MSCI USA Extended ESG Focus Index (used by the $17.6 billion iShares ESG Aware MSCI USA ETF (ESGU)), and the S&P 500 Scored & Screened Index (used by the $2.8 billion Xtrackers S&P 500 Scored and Screened ETF (SNPE)).
• The above-mentioned indices are offered by three index providers out of a field of some 30 index suppliers that are used by labeled sustainable index tracking mutual funds and ETFs—a total of 174 index funds/share classes with $199.5B in assets under management, or almost 50% of long-term labeled sustainable fund assets as of May 31, 2026.
• That said, the index provider space is concentrated. Six index providers, each with more than 1% of the labeled sustainable funds segment, based on assets under management (AUM), account for $185B in assets or 94% of index assets under management. The dominant provider is MSCI. The firm’s sustainable indices are used by some 45 funds/share classes with $87.2B in assets, covering 44% of the assets attributable to labeled sustainable index funds. The top three index providers alone, in addition to MSCI, include FTSE Russell and Nasdaq. These three providers account for 76% of the segment’s AUM.
• A few common patterns cut across some of the leading indices, in particular broad-based indices, that are worth noting and exploring further: (1) Sector tilt risk is an important return driver, (2) ESG quality, based on ESG scores, seems to correlate with financial quality, (3) Exclusions, screening and weighting conventions across certain companies, business activities and sectors have had less of a drag on performance and in some cases may have contributed to outperformance, and (4) Index methodology transparency varies.
• Sector tilt risk is an important return driver. When energy underperforms, as was the case in 2019–2021 and 2023–2024, most ESG indices beat their parent conventional indices. When energy outperforms, as was the case in 2022, they lag. Sector-neutral designs minimize this; pure-theme indices (Nasdaq Clean Edge) amplify it. The impact of exposure to the technology sector appears to have been more nuanced.
• ESG quality, even as it is based on ESG scores whose definitions and construction vary, seems to correlate with financial quality. Companies with strong ESG scores tend to have stronger governance, lower litigation exposure, lower leverage, and more stable earnings, characteristics that also drive financial quality factors. This embeds a latent quality/low-volatility tilt in most ESG indices, which tends to hurt in high-momentum bull markets and help in downturns.
• Exclusions, screening and weighting conventions across certain companies, business activities and sectors, have had less of a drag on performance and in some cases may have contributed to outperformance. This, based on a review of the performance track record over the five year period to May 2026 of the three large broad-based labeled sustainable index funds that employ a combination of similar (but not identical) screening, exclusions and weighting conventions while attempting to achieve sector neutral approaches (in the case of two of the funds) which shows that the three funds tracked their conventional counterparts with a degree of high closeness while exhibiting modest and alternating outperformance and underperformance across individual years. In addition to the sector neutral approaches and low expense ratios, a contributing factor was the fact that excluded sectors (energy, tobacco, defense in some cases) were not top performers in aggregate over that window. At the same time, the impact of exposure to the technology sector appears to have been more nuanced.
• Methodology transparency varies. Indices published by MSCI, FTSE Russell, S&P DJI, and Bloomberg, for example, all publish detailed methodology documents. Calvert’s proprietary research process is less transparent by design. This matters for investors who need to explain inclusion/exclusion decisions to constituents.
