Sustainable investing has been in retreat for years amid political backlash and steady outflows. That streak has finally broken.
US sustainable funds ended 14 consecutive quarters of net outflows in Q2 2026, pulling in nearly $3B. Total assets across the category hit a record, up 13% from the prior quarter, according to Morningstar.
However, the inflows were highly concentrated as passive ETFs attracted $6.5B while active funds bled $3.6B.
The fund that drove the rush
A single ETF explains most of the momentum. First Trust Nasdaq Clean Edge Smart Grid Infrastructure pulled in $3.1B during the quarter alone and has raked in over $7.5B over the past 12 months. Its one-year return stands at 32%. The fund holds companies involved in electric transmission, distribution, and grid-edge technology.
sits at the intersection of several demand signals at once. AI data centers are driving record electricity consumption. Aging grid infrastructure needs overhaul after years of underinvestment.
Geopolitical tension around the Strait of Hormuz has pushed oil prices toward $100 a barrel, making energy security a live concern again. Top holdings include Schneider Electric, Eaton, and Quanta Services.
The fund carries no ESG exclusionary screens. About 20% of its holdings are diversified companies that still operate natural-gas networks. Ryan Issakainen, ETF strategist at First Trust, notes it is selected for grid infrastructure exposure but not sustainability mandates.
First Trust Global Wind Energy added roughly $60M in Q2 and posted a one-year return of 30.7%.
iShares Global Clean Energy is up 35.9% over one year with $361M in net inflows year to date. Both funds allow some fossil-fuel-adjacent holdings.
Invesco Solar and iShares Energy Storage and Materials hold no fossil-fuel names and still delivered one-year returns of 44% and 69%.
Past returns were not built on fundamentals
Harvard Business School research offers a sharp warning about reading too much into past ESG performance. Assistant Professor Philippe van der Beck found that from 2012 to 2023, ESG-tilted funds outperformed by 2.2% annually on average. But 1.9 percentage points of that gain came from the inflows themselves, not from the underlying businesses.
Every $1 flowing into ESG funds generated roughly $0.80 of price pressure in ESG stocks. That nearly eliminates the perceived alpha.
Van der Beck simulated returns without the roughly $3T institutional demand shift and found ESG-tilted funds would have returned around 0.5% instead of 4% in the post-2018 period.
"If you are in ESG because you think it has high expected returns, then I would be very cautious, because the only way expected returns are continuing to be high is if people plow more money into ESG funds."
Philippe van der Beck, Harvard Business School
The flows didn’t predict future profitability, but rising share prices lowered those firms’ cost of capital. The money helped without necessarily pointing to better performance ahead.
The political backdrop still cuts against ESG
The recovery in flows is real but fragile. AI giants like OpenAI and Anthropic have not disclosed greenhouse gas emissions or published sustainability reports as they approach IPOs.
That is a sharp contrast to the early 2020s, when even fossil-fuel companies published sustainability reports voluntarily. The SEC has moved to rescind its 2024 climate disclosure rule, while investor interest remains well below its peak.
ESG-focused funds attracted $485B in 2021 but lost $82B in 2025, and closures continue to outpace launches, with 22 funds shutting in Q2 versus just three new ones.
BlackRock remains the largest manager of US sustainable fund assets at $76.1B, followed by Vanguard at $50.7B and Morgan Stanley at $36.6B.
The category hit a record high in total assets thanks to drivers like grid infrastructure and AI power demand. Investors coming back aren’t necessarily returning to ESG. Much of the money is going toward electricity infrastructure rather than traditional values-based strategies.
