Sustainable funds outperforming peers, new data shows
Analysis from Morgan Stanley’s Institute for Sustainable Investing shows performance bolstered by equity returns
In August 2024, Morgan Stanley surveyed some 900 institutional investors on their sustainable investing plans. The research, conducted by the firm’s Institute for Sustainable Investing, came back with two key findings. First, 80% of asset owners wanted to see more sustainable investment offerings. Second, asset owners were willing to switch managers in pursuit of them.
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Over two years later, the predictions check out. The institute’s latest analysis shows assets under sustainable fund management at a record high of $4.24tn. While inflows and returns could both reasonably explain AUM growth, the latter has taken the wheel in recent years.
The latest numbers show a marginal outperformance in sustainable funds for H1 2026.
Performance
The institute’s analysis relies on Morningstar data and fund classifications. Sustainable funds, according to the research methodology, are those that focus on ESG investing, sustainability or impact investing. That focus takes the form of screens, investment objectives and binding exclusions.
Nearly $38bn poured into sustainable funds in the first half of the year. If the 2024 predictions were right, these were allocations in search of growth.
The research found that sustainable funds delivered a median return of 4.9%, compared 4% for traditional funds. The analysis shows a lot of it had to do with an asset allocation tilt towards equities.
“Greater exposure to equities helped drive the outperformance: 56% of sustainable funds are invested in equities versus 41% for traditional funds”, the institute’s research concludes.
That equity outperformance seems to have weathered weaker performance in asset classes such as sustainable fixed income which registered a -1.3% return. Sustainable equity returned 9% in comparison.
Regional tilt
For the institute, the outperformance finding is hardly new. Last year too, first half numbers showed a sustainable fund outperformance of over 3%. Moreover, this was true in the long run.
The latest thinking also includes similar analysis. “A hypothetical $100 investment into a sustainable fund in December 2018 would have grown to $171 by the end of June 2026, assuming median returns were achieved in each period, compared to $159 for a traditional fund”, the note reads.
Historically, outperformance has had a European tilt. Sustainable funds tend to be domiciled in Europe. This time around, the funds outperformed across all major geographies and the highest numbers came from Asia and the Americas. In Asia-Pacific for instance, sustainable fund median return for H1 2026 stood at 11.6%, compared to 4.8% for traditional funds.
While some features of previous performance numbers have held true, new characteristics – regional changes for instance – have seemingly emerged. The latest evidence of sustainable fund outperformance has not only new directions but also familiar, older roots.
