Sustainable Strategies Shone in Q2

Key Takeaways

• The US Sustainability Leaders Index returned 27.8% during the second quarter, outperforming the broader market by more than 10 percentage points.
• Tech companies, specifically semiconductor names, were the largest contributors to the index’s returns.
• Eleven of 19 US-focused Morningstar Sustainability Indexes outperformed their broader-market benchmarks during the second quarter.

Leading sustainability stocks surged in the second quarter, outperforming the broader US market by their widest margin in over three years. Companies that scored the best on environmental, social, and governance (ESG) metrics saw market-beating returns in the second quarter of 2026, led by semiconductor stocks such as Advanced Micro Devices AMD, up 176.4%, Applied Materials AMAT, which rose 104.6%, and Lam Research LRCX, up 95.3%.

While it may sound surprising that energy-intensive semiconductor stocks can be included in sustainable indexes, these particular companies have done better than industry peers at mitigating and addressing ESG risks, according to Sustainalytics.

The Morningstar US Sustainability Leaders Index, which represents 57 large-cap US stocks with the best scores on ESG risk management, rose 27.8% in the second quarter. That’s well ahead of the broader Morningstar US Market Index, which rose 15.5%. The Sustainability Leaders Index hadn’t seen such outperformance since the first quarter of 2023, when mega-cap tech stocks drove 29.4% of returns, led by Nvidia NVDA and Salesforce CRM.

The rise of sustainability stocks marks a reversal from the year’s first quarter, when oil and gas energy stocks—typically excluded from ESG portfolios—delivered some of the highest returns in the broader market while tech stocks languished. Sustainable investing strategies underperformed in the first three months of the year. The Sustainability Leaders Index fell 6.8% in the first quarter, a further decline than the broader market’s 5.6% loss.

Semiconductor Stocks Drove Sustainability Gains in Q2

“This quarter, several semiconductor stocks in the Sustainability Leaders Index posted huge gains,” says Morningstar Indexes strategist Dan Lefkovitz. He says many of the second quarter’s leading index constituents were beneficiaries of the AI infrastructure buildout, highlighting AMD, Lam, and Applied as top performers. “These companies also do a good job of managing ESG-related risks, in the view of Sustainalytics.”

Semiconductor companies—both those that design chips and those that produce the machinery needed to create them—almost singlehandedly drove the sustainability leaders index’s strong second quarter performance, accounting for a whopping 24 percentage points of the index’s 27.95% overall return. Semiconductor stocks currently make up the largest industry weighting in the index at 33%.

Of the 12 semiconductor stocks in the Morningstar US Large Cap Index, only six made the cut based on their lower ESG risk scores. Semiconductor stocks have been driven upward by the data center boom. Data centers are environmentally risky, but it’s hard not to own them, as Leslie Norton explains in a recent article for Morningstar. “This year, sustainable funds have been heavy buyers of names that make AI infrastructure more sustainable and resilient, such as chip specialist Advanced Micro Devices, storage outfit Seagate, and engineer Eaton,” she writes. She explores how sustainability fund managers are looking ahead to more renewable energy sources powering data centers.

Overall, four of the five leading contributors in the sustainability index were semiconductor companies: AMD, Applied, KLA KLAC, and Lam. Cloud cybersecurity stock Palo Alto Networks PANW also made the list.

Sector Concentration Amplified Sustainability Portfolios’ Outperformance

“The Sustainability Leaders Index is heavily weighted toward technology stocks, so its performance will be heavily driven by that sector, for better or worse,” says Lefkovitz. About 59% of the Sustainability Leaders Index’s weight is tech stocks. In the first quarter, the group’s overconcentration in the sector detracted from sustainable strategies. Microsoft MSFT, down 23.3%, IBM IBM, which fell 17.7%, and Nvidia, down 6.5%, were key detractors during that time.

But in the second quarter, overconcentration in tech served the Sustainability Leaders index especially well amid positive earnings results and data-center-related buildout news. “The Sustainability Leaders Index only includes large-cap stocks. As a ‘leaders’ index, it’s very concentrated, with a lot of weight in top holdings,” Lefkovitz says. “The fact that many of those heavily weighted stocks were AI-related turbocharged returns in the second quarter.”

The Sustainability Leaders Index comprises large-cap stocks with lower environmental, sustainability, and governance risks than the wider market – either because their respective industries are less exposed to these risks or because the individual companies are better than their peers at mitigating the key risks.

Though tech stocks are heavily represented in the index, not all are sustainable. Facebook parent company Meta Platforms META is excluded from the index. “Meta, which posted negative returns in the second quarter, faces a high level of ESG-related controversies, according to Sustainalytics, so it is currently ineligible for the index,” Lefkovitz explains. The Sustainability Leaders Index was further bolstered by its exclusion of Meta in the second quarter, since the stock fell over 2%.

In addition, the Sustainability Leaders Index excludes stocks related to areas like nuclear production, gambling, alcohol, and adult entertainment. It’s underweight in fossil fuels and overweight in technology. As a result, it and other ESG indexes can look markedly different from the broader market.

The Performance of Sustainability Stocks Across the Spectrum

Of the 19 Morningstar standard sustainability indexes, which screen out companies with the highest ESG risk ratings in their respective industries, 11 outperformed their broader market benchmarks during the second quarter. Just five of 19 beat their non-ESG benchmarks over the trailing five-year period.

The Sustainability Leaders Index was the best-performing index of the sustainability group during the second quarter. It’s also ahead of all other US sustainability indexes over the trailing five-year period.

Close behind was the Morningstar US Sustainability Large-Mid Cap Broad Growth Index, which rose 25.3% in the second quarter. Its leading contributors were semiconductor company Marvell Technology MRVL, which rose over 200.0%, and Seagate Technology STX, up 146.5%. Meanwhile, the Morningstar US Sustainability Moat Focus Index, which tracks low- to medium-ESG-risk companies with wide economic moat ratings, brought up the rear with its second-quarter gain of 5.14%.