US sustainable fund flows rebound for the first time since 2022

US sustainable funds reported some $3bn of inflows in Q2 2026, marking a significant change for a corner of the market that has long been plagued by outflows, according to the latest Morningstar Sustainable Fund Flow data.

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The rise comes on the back of overall strong inflows, with conventional funds reporting $356bn in inflows in Q2, up from $337bn in the previous quarter.

Overall, US sustainable fund assets rose to nearly $398bn in Q2, representing a new high-water mark for the category and a 13% increase from the $350bn recorded at the end of March, the data provider said.

This growing investor appetite is driven by two key factors, according to Monika Calay, director of UK manager research, with the rise of AI redefining investor appetite for sustainable funds.

"Sustainable funds have initially struggled because they avoid oil and gas, but there's another story from an ESG perspective, which is renewable energy. We have seen funds involved in strengthening the electric grid to better support demand from AI emerging as key beneficiaries," she explained.

The latest rise is almost exclusively driven by a single ETF, with the First Trust Clean Edge Smart Grid Infrastructure fund reporting more than $3bn in inflows alone, Calay said.

At the same time, investor money is concentrating in a smaller number of funds. During the last quarter, a total of 22 sustainable funds closed in the US and only three new funds were launched.

There is further nuance to the picture, with the growing investor demand for passive strategies being another trend dominating the market, Calay highlighted.

"Seventy-five per cent of total flows went into passive strategies. It's not just a sustainable story, it's a broader story that we're also seeing play out in the sustainable arena."

This broadly positive trend is also replicated across Europe, where European sustainable funds recovered from a slump caused by the war in the Middle East. At the same time, the European sustainable fund market is also consolidating, with some 64 sustainable funds closing in Q2 and only 13 new funds being launched.

Calay cautioned that it was too early to predict whether the growth in investor demand for sustainable funds can be sustained. Fund flow data only cover the mutual fund market and do not provide information on segregated mandates, therefore offering a limited view of trends in the wider institutional market. Morningstar's data also excludes the Chinese market. 

However, in Europe, the closure of the Brunel LGPS pool has left its mark on the wider sustainable fund landscape, as Brunel's Sustainable Equity Fund closure accounted for a whopping $5.6bn in outflows in Q2. These will be offset by transitions into similar mandates at other pools.

Replicating the trend seen in the US, European funds specialising in AI, data centres and space also emerged as key beneficiaries.