Morningstar Reports $6.5B Sustainable Fund Inflows Despite US Outflows

Global sustainable investment funds attracted an estimated $6.5 billion in net inflows during the third quarter of 2026, driven by renewed demand in Europe despite continued withdrawals from US sustainable funds. According to Morningstar's Global Sustainable Fund Flows Q3 2026 report, published in November, European funds gathered $9.4 billion, while US funds recorded $2.8 billion in outflows. Despite positive global flows, total sustainable fund assets declined 2.1% to $3.79 trillion from a revised $3.87 trillion in the previous quarter.

The report highlights growing differences in sustainable investment demand across regions and between active and passive strategies. Europe accounted for approximately 84% of global sustainable fund assets, while the US represented 10%. The global inflow estimate excludes China, where third-quarter fund flow data was unavailable at the time of publication.

 

European Sustainable Funds Attract $9.4 Billion

 

European sustainable funds recorded their third consecutive quarter of net inflows, attracting $9.4 billion compared with a revised $3.7 billion in the second quarter. Passive investment strategies drove the growth, attracting $10.8 billion, while actively managed sustainable funds saw $1.4 billion in withdrawals. Active strategies have now recorded five consecutive quarters of outflows, indicating that the European recovery remains concentrated in index-tracking and other passive investment products.

Sustainable fixed-income funds attracted $8.8 billion, while equity funds received $2.2 billion. BlackRock led European sustainable fund providers with approximately $7.2 billion in net inflows, around three-quarters of which went into its passive-focused iShares products. The company also remained Europe's largest sustainable fund manager, with approximately $451 billion in assets, followed by Amundi with $238 billion and UBS with $204 billion.

 

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US Sustainable Funds Return to $2.8 Billion Outflows

 

US sustainable funds returned to negative flows after attracting $3 billion in the previous quarter, their first positive quarter since 2022. The market recorded $2.8 billion in net redemptions during the third quarter, driven by $5.5 billion in withdrawals from actively managed funds. Passive strategies continued to attract capital, recording $2.7 billion in inflows for the fourth consecutive quarter.

For the first time, passive sustainable funds overtook active strategies in the US by assets under management. Passive assets reached approximately $200 billion, representing 51.5% of the market, compared with $188.7 billion in actively managed sustainable funds. Investor demand remained selective, with the First Trust Nasdaq Clean Edge Smart Grid Infrastructure fund attracting approximately $590 million, reflecting interest in electricity infrastructure supporting rising power demand from AI and data centers. Meanwhile, Parnassus Core Equity recorded approximately $2.6 billion in redemptions.

 

Asia and Other Markets Show Diverging Investment Trends

 

Outside Europe and the US, sustainable fund flows remained mixed. Canada attracted $97 million in net inflows, while Australia and New Zealand gathered approximately $155 million based on data available through August. Japan recorded $204 million in withdrawals, extending its streak to 17 consecutive quarters of net outflows. This contrasted with the broader Japanese investment fund market, which attracted approximately $50 billion during the same period.

Asia excluding Japan and China experienced $144 million in net outflows. Singapore recorded $870 million in withdrawals, while South Korea lost $253 million. Taiwan partly offset these declines with $779 million in inflows. Morningstar found that passive strategies continued to outperform active funds across several markets, although regional differences in investment demand remained substantial.

 

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Global ESG Fund Assets Decline as New Launches Slow

 

Despite the positive global inflows, sustainable fund assets declined by approximately $80 billion during the quarter. European sustainable fund assets fell to $3.19 trillion from $3.26 trillion, while US assets declined to approximately $389 billion from $397 billion. The reduction indicates that market performance had a greater effect on total assets than the additional capital invested during the quarter.

Product development also slowed considerably. Europe launched just three new sustainable funds, compared with 16 in the previous quarter, while 63 European funds closed. No new sustainable funds launched in the US, Canada, Australia, New Zealand or Japan. China accounted for all seven new launches in Asia excluding Japan, with several products targeting renewable energy, green electricity and other energy transition industries.

 

Passive Investing Shapes the Sustainable Fund Market

 

Morningstar's findings indicate that sustainable investing is experiencing an uneven recovery, with European inflows supporting the global market while US and Japanese investors continue withdrawing capital. The shift toward passive strategies is particularly significant, as investors increasingly favor index-based products and selected themes, such as energy infrastructure, over traditional actively managed sustainable funds.

The report also highlights the continued slowdown in sustainable fund launches amid regulatory uncertainty and industry consolidation. With European policymakers reviewing the Sustainable Finance Disclosure Regulation (SFDR), future product development and fund classifications could change further. The third-quarter results suggest that although capital continues to enter sustainable investment products, demand is increasingly concentrated in particular regions, investment strategies, and asset classes.

 

Source: Morningstar