U.S. equity markets have surged in 2024 as a handful of large-cap tech stocks have lifted the S&P 500 by more than 23% as investor excitement over artificial intelligence (AI) has reached levels last seen during the dot-com bubble almost 35 years ago.

As all boats have been lifted by the AI tide, ESG and impact fund performance has been largely dictated by whether they hold the same stocks driving returns in mainstream funds — and how much.

The Invesco ESG NASDAQ 100 ETF QQMG , which excludes certain securities from the benchmark NDX index that do not meet ESG criteria, has climbed by 22.6% year-to-date. By contrast the Invesco QQQ Trust QQQ , a pure index fund that holds the Nasdaq-100 passively, has only registered returns of 21.5% since the year began.

A quick look under the hood explains why. While the index replicating QQQ holds over 8.5% of its portfolio in NVIDIA NVDA the total exposure in QQMG is over 11%. As fossil fuel producers and other non-ESG have been filtered out of QQMG’s portfolio it’s concentration in the so called “Magnificent seven” — the mega-cap tech stocks driving the bull market, has increased.

By contrast, many of the more traditional “stock pickers” in the impact and ESG space have trailed benchmarks due to lower exposures to AI names.

The venerable Trillium Core Equity is a case in point. Founded in 1982 by pioneering ESG investor Joan Bavaria and managed for almost the past 18 years by Cheryl Smith, the fund has been a bellwether of socially conscious investing for more than four decades. Year-to-date, the fund’s NAV has climbed by less than 16.5%. According to the fund’s latest filing, its portfolio exposure to NVDA and AAPL were less than 6% each.

In some ways the role of AI stocks in market performance is bringing non-ESG investors into the sustainable energy sector. Electricity demand for AI data centers has led to a revival of nuclear power with major investments by Amazon and Google parent Alphabet.

The strong correlation of returns driven by a small group of stocks may provide a challenge, namely, standing out from the pack, for ESG managers despite the positive returns it has brought.

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