Following a challenging year for sustainable funds in 2025, the sector has shown encouraging signs of recovery in 2026.
“By the end of the second quarter 2026, global sustainable funds had attracted an estimated $3.7 billion, according to Morningstar data, in net inflows, reflecting a renewed, albeit selective, interest from investors in sustainable investment strategies,” says Diya Iyer, investment and sustainability analyst at Davy, a provider of wealth management and investment banking services.
“Investors are increasingly recognising sustainability factors as financially material considerations, viewing them as a means of capturing long-term growth opportunities while enhancing portfolio resilience and managing investment risks.”
The current environment, with its ongoing geopolitical tensions, higher interest rates and energy security concerns, has led investors to take what she calls a “more evolved” approach to sustainable investing.
READ MORE
“Investors are increasingly recognising the importance of sustainability considerations as a source of both risk and opportunity, particularly where these factors demonstrate clear financial relevance and long-term value creation,” says Iyer.
“Themes such as energy security, climate change and the costs and risks associated with a delayed energy transition have become particularly prominent in recent times, further strengthening the investment case for strategies that can deliver both long-term returns and resilience.”
That said, the sustainable investing market is somewhat polarised, particularly between the US and Europe, reflecting differing political and regulatory environments.
“While this divide was most evident in 2025, recent trends suggest it is beginning to narrow. Sustainable fund flows in the US have returned to positive territory after an extended period of outflows, while Europe continues to see strong and consistent investor demand, indicating ongoing appetite for sustainable investments where the financial rationale is clear,” says Iyer.
The range of responsible investment solutions on the market has grown.
“Over the last decade, the range of responsible investment solutions available to clients has expanded significantly, alongside the variety of approaches used to deliver them. Investors are now well served across traditional asset classes such as equities and fixed income. Responsible investment opportunities have also become increasingly accessible within alternative asset classes, including infrastructure and real estate, while the range of liquid diversifying strategies continues to grow,” says Patrick McLoughlin, Davy’s head of responsible investment multi-asset solutions.
“Our own offering adopts a multi-asset, fund-of-funds approach, providing investors with a well-diversified solution for long-term capital growth. The strategy aims to deliver diversification across asset classes, geographies, investment styles, factors, and ESG perspectives, helping to create a resilient portfolio capable of navigating a range of market environments.”
By combining complementary responsible investment strategies within a single portfolio, investors can access a broad spectrum of opportunities while remaining aligned with their sustainability objectives, he says.
But when it comes to responsible investment, is there a trade-off in terms of expected returns? Not unless it’s your only focus, it seems.
“The most significant determinant of long-term investment returns is an investor’s strategic asset allocation (SAA), which defines the allocation across equities, fixed income, alternatives and cash. In our view, over a long-term investment horizon, the impact of this decision is considerably greater than the decision to invest through a responsible investment framework,” says McLaughlin.
“It is important to recognise that there will be periods when the performance of responsible investment strategies differs from that of broader market benchmarks. Such periods of relative outperformance or underperformance are a natural consequence of differing sector exposures [such as energy], security selection, and ESG considerations,” he adds.
“However, we believe that maintaining an appropriate strategic asset allocation remains the primary driver of long-term outcomes, with responsible investing representing an additional lens through which investment opportunities and risks are assessed.”
He believes investors looking for peace of mind that their money isn’t funding companies that do not align with their values can take solace from the EU Sustainable Finance regulatory framework. Its primary objective is to enhance investor confidence by improving transparency, consistency and comparability across investment products.
The introduction of the ESMA Fund Naming Guidelines in 2025 helps too, establishing baseline exclusion criteria for funds using sustainability-related terms, helping to create a clearer and more consistent framework for investors.
“Together these developments should provide greater confidence that investments marketed as responsible or sustainable meet a minimum set of responsible investment characteristics,” says McLaughlin.
