US Sustainable Funds End 14-Quarter Outflow Streak, Driven by Grid Infrastructure

US sustainable funds attracted nearly $3 billion in net inflows during the second quarter of 2026, ending 14 consecutive quarters of net outflows and marking the category's first quarter of positive flows since early 2022, according to Morningstar research. Total assets in sustainable funds reached a record $398 billion by the end of June, up 13 percent from $351 billion at the end of March, driven by both inflows and market appreciation. Even so, conventional long-term funds continued attracting far stronger demand, collecting $356 billion during the same quarter.

 

Why One Grid Infrastructure Fund Drove the Turnaround

 

The recovery was heavily concentrated rather than broad-based. The First Trust Nasdaq Clean Edge Smart Grid Infrastructure Index ETF collected $3.1 billion during the quarter, its fourth consecutive quarter of inflows and more than $7.5 billion over the past 12 months, effectively powering the category's overall turnaround on its own. The fund targets companies strengthening electric grid infrastructure to handle surging demand from AI and data centres alongside the fluctuating supply that renewable generation introduces to power systems.

That framing captures why this particular fund category, rather than broader environmental or governance-themed sustainable funds, attracted such concentrated investor interest. Top holdings including Eaton, which derives most of its revenue from selling electrical components for data centres and utilities, and Schneider Electric, a global leader in energy management and electrical distribution with a strong data centre foothold, gained nearly 35 percent and 20 percent respectively in the first half of 2026. Those gains helped drive the fund to a 25 percent year-to-date return, comfortably outperforming the Morningstar US Market Index's 10.7 percent rise over the same period, even as many AI-adjacent stocks including Nvidia pulled back during the second quarter specifically.

 

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How Energy Security Concerns Reinforced Renewable Energy Demand

 

A second, distinct driver reinforced the AI infrastructure theme: conflict in the Persian Gulf pushed oil prices above $100 per barrel during the quarter, and while most sustainable funds avoid direct exposure to traditional oil and gas companies, renewable energy stocks benefited as governments sought to diversify away from legacy energy suppliers exposed to that geopolitical disruption. Enlight Renewable Energy, a top holding in the First Trust Global Wind Energy ETF, nearly doubled in value through late July, helping that fund gain 16 percent over the same period while collecting more than $60 million in net flows through June.

That combination, AI-driven grid infrastructure demand alongside energy-security-driven interest in renewables, illustrates two distinct but complementary mechanisms currently pulling investor capital toward the sustainable fund category: one rooted in the physical infrastructure needs of the AI buildout, the other in geopolitical risk management and energy diversification.

 

Why Passive Strategies Are Capturing All the New Demand

 

The recovery was driven entirely by index-tracking passive strategies, which attracted $6.5 billion during the quarter, more than offsetting $3.6 billion withdrawn from actively managed sustainable funds. Active sustainable funds have now recorded 13 consecutive quarters of outflows, a gap between active and passive flows that has widened steadily over several years and mirrors a broader shift across the entire US fund industry toward lower-cost index products generally.

That divergence suggests investors returning to sustainable funds are doing so through targeted, thematic exposure to specific investable trends like grid infrastructure or wind energy, delivered through low-cost passive vehicles, rather than through actively managed funds pursuing broader environmental, social and governance mandates. Passive assets rose sharply from $167 billion to nearly $199 billion during the quarter, meaning passive strategies now account for almost half of all sustainable fund assets, a meaningful structural shift in how the category itself is composed.

 

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Why the Global Picture Remains Uneven

 

Sustainable funds attracted an estimated $3.7 billion in net flows globally during the quarter, extending a rebound that began in the first quarter, but that recovery was distributed unevenly across markets. Europe and the US both recorded net inflows, while Canada, Japan, Australia, New Zealand and most of Asia excluding China continued experiencing net redemptions. Europe remains the dominant market globally, holding more than 80 percent of sustainable fund assets and posting steadier flows than the more volatile US market over recent years.

Global sustainable fund assets reached an estimated $3.7 trillion by the end of the second quarter, up from $3.5 trillion the previous quarter, a new record for the category driven primarily by market appreciation rather than new inflows, since asset growth outpaced the actual volume of new investor capital entering these funds. Whether the concentrated recovery in US sustainable funds broadens beyond grid infrastructure and renewable energy themes into a more diversified rebound across active and passive strategies alike, and whether the currently divergent regional flow patterns converge as energy security and AI infrastructure themes continue playing out globally, will indicate whether this quarter marks a genuine inflection point for the sustainable fund category or a narrow, thematically-driven recovery.

 

Source: Morningstar