Sustainable Investing Monitor-September 2026

Long-Term Net Assets of Focused Sustainable Mutual Funds and ETFs: 2025 – 8/31/2026

The total net assets of labeled sustainable long-term mutual funds and ETFs bounced back above the $400 billion dollar level at the end of August to reach $401.6 billion, a net increase of $7.9 billion or 2%.  At the same time, the segment experienced another decline in the number of funds due to liquidations, reorganizations and re-brandings–dropping from 997 to 980 mutual funds/share classes, or a decline of 17 funds/share classes that covered 13 mutual funds/share classes and four ETFs.         

Benefiting from a rebound in U.S. and international equities in August due to exceptionally strong second-quarter earnings season and renewed enthusiasm for AI-related capital spending, labeled sustainable long-term funds gained an average of 1.67% on a total return basis. Mutual funds, with their greater exposure to fixed income funds and securities, added a slightly lower 1.56% while ETFs gained 2.18%.  Both segments experienced net asset gains, with mutual funds adding $2.4 billion and ETFs posting an increase of $5.5 billion. However, both results were impacted by cash flows. Using the back of the envelope calculation (not adjusted for impacts due to liquidations, reorganizations and re-brandings, long-term funds, in the aggregate, experienced net cash inflows. ETFs are estimated to have benefited from $2.1 billion in net inflows while mutual funds offset this gain with an estimated $1.3 billion in cash outflows.      

Since the start of the year, the assets of labeled long-term sustainable mutual funds and ETFs expanded by $27.0 billion, or an increase of 7.2% versus an average total return increase of 10.1% based on funds in operation at the end of August.    

New Focused Sustainable Fund Launches: 2025 – 8/31/2026

There were no new funds listings recorded in August, and the number of new funds launched since the start of the year remains unchanged at four funds—all ETFs listed in May and June of the year. Since the start of 2025, a cumulative total of 14 new funds came to market.  

The year-to-date tally continues to reflect a scarcity in new listings that extends the dramatic slowdown in new focused or labeled long-term sustainable fund offerings starting in mid-2023 to-date. Contributing factors include, but are not limited to, a political backlash against ESG investing, potentially a diminishing level of response to ESG-labeled fund products as well as compliance with the SEC’s amended Names Rule. The Names Rule that took effect in December 2023 with phased compliance deadlines as early as June 2026 for large-fund groups may also be holding back new fund launches and contributing to fund re-brandings and liquidations. Some of the latest liquidations include four ETFs offered by BlackRock’s iShares that pursued various sustainable allocation mandates, the reorganization of Putnam’s Sustainable Future Fund (5 share classes) into the U.S. Research Fund and the modifications in the sustainable investing  approaches used by RBC BlueBay Core Plus Bond Fund and the RBC BlueBay Strategic Income funds that no longer qualify under Morningstar’s labeling criteria.    

Green, Social and Sustainability Bonds Issuance to 6/30/2026 (with update comments)  

Q3 2026 to date. Comprehensive third-quarter issuance data will not be available until after the quarter closes on September 30. Even so, transactions announced through late September point to a quarter that followed the familiar seasonal pattern: a quieter July and August, then a busy September. Europe and the public sector again did the heavy lifting, while U.S. corporate issuance remained subdued. For context, third-quarter global issuance ranged from $158.8 billion (Q3 2023) to $225.7 billion (Q3 2024) over the past three years and reached $224.9 billion in Q3 2025. If the current quarter matches last year’s third-quarter total, year-to-date global issuance would reach about $753.6 billion, based on SIFMA data.   

Notable transactions. In addition to the July and August transactions highlighted in last month’s Monitor (Royal Philips, IFC, Klépierre, CTP and Genova Property Group), the following deals stood out during the quarter:

-Republic of Italy: Placed a new €8 billion 12-year BTP Green due October 2038 on September 22 at a yield of 4.492%. Orders exceeded €110 billion, nearly 14 times the amount issued.

-World Bank (IBRD): Priced a USD 4 billion 7-year Sustainable Development Bond on August 18 that drew more than $11 billion in orders from over 150 investors. A week later, on August 25, it priced a EUR 3 billion 10-year Sustainable Development Bond against a €6 billion order book.

-KfW: The German development bank raised €3 billion in the week of September 21 in what was reported as its final euro green benchmark of 2026.

-European banks: BBVA (€1.25 billion), AIB (€750 million, its tenth green bond) and BPER Banca (€500 million, with pricing tightened by 30 basis points) all brought green bonds in the same week in late September.

-ESB: Ireland’s state-owned electricity company raised €500 million through a 10-year, 4.375% bond on September 22. It was the first Irish corporate issue under the European Green Bond (EuGB) Regulation, with proceeds going to grid, renewable generation and battery storage projects. Ericsson also raised €500 million from a green bond.

-State of New York: Completed its inaugural ESG-designated general obligation sale in September, totaling $318.9 million of sustainability bonds ($59.5 million taxable and $259.4 million tax-exempt) to fund transportation, education, clean water and other environmental projects.

-Hong Kong SAR Government: Announced plans in late September to issue up to HK$20 billion (about US$2.6 billion) in multi-currency digital green bonds, which would be the largest digital bond sale on record.

What Q3 activity says about the drivers. The quarter’s deal flow offers early evidence on the drivers that include widening regional divergence, Europe’s share of issuance is running well above expectations, and sovereign, supranational and agency order books remain deep. In the U.S., apparent reluctance among corporations to issue labeled debt is leaving public-sector debuts such as New York’s to carry the market.

Q2 recap

According to SIFMA, fixed income issuance in the U.S. decreased slightly in Q2 2026 to $3.2 trillion, or a decline of 1.7% on a quarter over quarter basis. Against this backdrop, U.S. sustainable debt (including green, social and sustainability bonds) issuance reached $40.1 billion versus $29.6 billion in Q1, for a Q/Q increase of $10.5 billion, or 35.4%.  Compared to the second quarter of 2025, sustainable debt issuance expanded by $1.8 billion, for an increase of 4.7%.  Sustainability bonds accounted for 52.5% of the issuance volume in the second quarter while green bonds and social bonds made up 40.7% and 6.8%, respectively.  Since the start of the year, issuance of sustainable debt instruments in the U.S. reached $69.6 billion compared to last year’s $95.2 or a drop of 27%.  A straight-line interpolation suggests that 2026 U.S. sustainable debt issuance could end up at around $139.2 billion, which would represent a decline of $45.1 billion, or a significant drop of 24%.    

Worldwide, issuance also picked up momentum relative to Q2. Total issuance reached $287.8 billion in Q2, for a strong increase of $46.9 billion or 19.5%.  Green bons accounted for 68.9% of issuance while sustainability and social bonds stood at 18.5% and 12.6%, respectively.  Year-to-date, global sustainable debt reached $528.7 billion versus $467.6 billion registered during the first six months of the prior year, or an increase of $61.1 billion or 13%.  A straight-line interpolation suggests that this year’s global issuance could exceed $1.0 trillion. 

S-T Relative Performance of Selected Sustainable Indices vs. Conventional Indices to 8/31/2026 

Markets in Review. U.S. and international equities rebounded in August 2026. The S&P 500 gained 2.7%, its first monthly advance since May, powered by an exceptionally strong second-quarter earnings season and renewed enthusiasm for AI-related spending, underscored by Nvidia’s results. The MSCI USA Index added 2.73%, while U.S. small caps (MSCI USA Small Cap Index) lagged with a 1.90% gain. Energy stocks were lifted by escalating U.S.–Iran hostilities and firm commodity prices. Rates remained a headwind. At the Jackson Hole symposium in late August, Fed Chair Kevin Warsh delivered a hawkish address reaffirming the Fed’s 2% inflation target, which pushed short-term yields higher, and the 30-year Treasury yield reached 5.33%, its highest level since 2007. Even so, the Bloomberg US Aggregate Bond Index eked out a 0.39% gain.

International markets also advanced. Developed markets (MSCI EAFE) gained 1.99%, while emerging markets (MSCI EM) led with a 3.37% gain, driven by AI-linked technology shares in Taiwan and South Korea. The combined MSCI ACWI ex USA Index rose 2.57%. Against this backdrop, labeled sustainable long-term funds gained an average of 1.67% in August.

Near-term results posted by selected sustainable indices. All six sustainable indices posted gains in August, but relative results were mixed. Two benchmarks outperformed. The MSCI USA Selection Index rose 3.60%, ahead of the MSCI USA Index by 0.87 percentage points, and the MSCI USA Small Cap Selection Index edged its conventional counterpart by 0.11 points. Three benchmarks trailed: the MSCI EM Selection Index (up 2.21%, or 1.16 points behind), the MSCI ACWI ex USA Selection Index (0.50 points behind) and the MSCI EAFE Selection Index (0.35 points behind). The Bloomberg MSCI US Aggregate ESG Focus Index matched the Bloomberg US Aggregate Bond Index, with both gaining 0.39%.

Across the four short-term intervals (one month, three months, year-to-date and 12 months), the six sustainable indices outperformed in 10 of 24 comparisons, underperformed in 13 and matched once. Results varied widely by index:

-MSCI USA Selection Index: Outperformed in all four periods. Its 12-month lead widened to 3.15 points (22.76% versus 19.61%), up from 1.50 points at the end of July.

-Bloomberg MSCI US Aggregate ESG Focus Index: Outperformed in three periods and matched in one, by margins of no more than 3 basis points.

-MSCI USA Small Cap Selection Index: Led by 3.33 points over three months but trailed year-to-date (by 0.93 points) and over 12 months (by 1.44 points).

-MSCI EAFE Selection Index: Trailed in all four periods, although by modest margins of 0.22 to 1.22 points.

-MSCI ACWI ex USA Selection Index: Trailed in all four periods, including by 4.94 points year-to-date and 5.91 points over 12 months.

-MSCI EM Selection Index: Outperformed only over three months, when it declined less (-0.90% versus -1.22%). It trailed by 12.69 points year-to-date and by 15.22 points over 12 months (24.03% versus 39.25%), a gap that widened from 13.76 points at the end of July.

What is driving the gaps. MSCI Selection indexes are built to hold roughly 50% of the market capitalization of each GICS sector, so sector weights stay close to the parent index. Relative results are therefore driven mainly by which companies are included or excluded and by the resulting concentration, as the remaining names carry roughly 1.75 to 1.9 times their parent-index weights. In the U.S., this construction amplifies exposure to AI leaders. At the end of August, NVIDIA represented 14.52% of the MSCI USA Selection Index versus 7.70% of the MSCI USA Index, Microsoft 10.20% versus 5.41%, and Alphabet (both share classes) 10.05% versus 5.33%. In emerging markets, the construction has worked against the sustainable index. Samsung Electronics, the parent index’s second-largest constituent at 7.20% (plus 0.89% in preferred shares), does not appear among the Selection index’s top holdings, even as South Korean equities have surged on booming memory-chip demand. The Selection index is also underweight South Korea (16.90% versus 20.84%) and India (6.83% versus 11.25%). Because emerging markets are a meaningful component of the MSCI ACWI ex USA Index while the EAFE Selection gap is comparatively small, much of the ACWI ex USA Selection Index’s shortfall appears to trace back to its emerging markets exposure.

Intermediate-to-long term results posted by sustainable indices. Through August, the MSCI USA Selection Index remains the only one of the five stock-oriented benchmarks to outperform its conventional counterpart over each of the trailing three-, five- and ten-year periods. Its annualized margins are 0.34, 0.74 and 0.31 percentage points, respectively (20.99% versus 20.65%, 12.59% versus 11.85%, and 15.11% versus 14.80%). Over ten years, the modest annual edge compounds to a cumulative return of 308.4% versus 297.6% for the MSCI USA Index. On a hypothetical $10,000 investment, that is roughly $40,844 versus $39,757.

The other four equity indices trailed their conventional counterparts over all three intervals. Annualized shortfalls are widest over three years, ranging from 2.50 points (MSCI ACWI ex USA Selection) to 2.80 points (MSCI USA Small Cap Selection). Over five years they range from 1.50 points (Small Cap) to 2.70 points (EM), and over ten years they narrow to between 0.79 points (EAFE) and 1.04 points (Small Cap). Although the ten-year gaps look small on an annualized basis, compounding makes them meaningful. Cumulative ten-year shortfalls range from about 17 percentage points for the EM and EAFE Selection indices (125.9% versus 143.1% and 131.4% versus 148.7%, respectively) to almost 26 points for the Small Cap Selection Index (163.4% versus 189.4%).

Timing matters. Because the ten-year figures include the most recent three- and five-year results, the annualized data can be used to estimate relative performance in earlier sub-periods. Backing out the trailing five-year returns implies that, over the five years ended August 2021, the MSCI EM, ACWI ex USA and EAFE Selection indices actually outperformed their conventional counterparts, by roughly 1.2, 0.6 and 0.3 percentage points a year, respectively. Their underperformance is therefore concentrated in the past five years, a stretch that included the 2022 energy price shock and the 2025–2026 surge in commodity-linked and memory-chip stocks, periods that favored companies ESG screens tend to underweight or exclude. The reverse holds for the MSCI USA Selection Index, whose outperformance is also a feature of the past five years and coincides with its heavier weighting in mega-cap technology leaders.

With regard to fixed income, the Bloomberg MSCI US Aggregate ESG Focus Index continues to track the Bloomberg US Aggregate Bond Index almost exactly. It outperformed by a single basis point over both three years (4.09% versus 4.08%) and five years (-0.28% versus -0.29%). This is consistent with its optimized design, which tilts toward issuers with higher ESG ratings while keeping risk characteristics close to those of the parent index. A ten-year record is not yet available.

Bottom line. Across these six benchmarks, the evidence suggests that the relative performance of sustainable indices depends less on an inherent ESG “premium” or “penalty” than on the portfolio exposures that index construction creates: which companies are excluded, and how heavily the remaining names are weighted. That concentration has helped in the U.S. and hurt in emerging markets, and either outcome can reverse as market leadership shifts. Investors in sustainable index funds should expect periods of meaningful tracking differences in both directions, and should look past the ESG label to the underlying holdings.