Sustainable funds are enduring a tough period at present, with many investors focused on previously unpopular sectors like defence and energy. But for ethically-minded investors, that could make now an excellent time to buy sustainable funds.
Global sustainable open-ended funds and exchange-traded funds (ETFs) registered total outflows of $27 billion in the fourth quarter (Q4) of 2025, according to data from investment research company Morningstar. Over the whole of 2025, sustainable funds saw $84 billion in outflows.
“2025 marked the first full year on record (since at least 2018) in which European sustainable funds experienced net outflows, indicating a cooling in investor demand,” said Kenneth Lamont, principal at Morningstar.
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Despite them not being the most popular funds, assets held in sustainable funds grew in aggregate by around 4% during Q4, thanks to stock market gains. In the seven years from the end of 2018, global sustainable fund assets have grown from around $600 billion to $3.9 trillion.
A backlash against ‘Environmental, Social and Governance’ (ESG) considerations, as well as a surge in demand for non-ESG sectors like defence and oil stocks, have contributed towards sustainable funds struggling of late, but does this represent an opportune moment to invest in them?
Sustainable investment funds: everything you need to know for environmental investing
Sustainable funds have “an objective to deliver sustainable outcomes, whether that’s to people or the planet,” said Jacob Kasaska, fund research associate at MainStreet Partners.
One thing to bear in mind is that you’re unlikely to make a quick profit investing in environmental funds. This is an area that is much better-suited to patient, sticky capital.
“You need to do the research to identify the right opportunities, and you need a process for that,” said Kasaska. “The opportunities do exist; it’s just about finding them.”
As of April 2025, UK funds can no longer call themselves “sustainable” unless they adopt one of the four labels. Each of these has a more precise set of objectives, and funds adopting one must be able to demonstrate that 70% of its investments align with the objective. The four labels are:
- Sustainability focus: investments in assets that can be shown, using a robust evidence-based standard, to be environmentally and/or socially sustainable;
- Sustainability impact; investments in solutions to problems that affect people on the planet, especially in underserved markets or to address market failures, making a measurable real-world impact;
- Sustainability improvers: investments in assets that may not be sustainable now but have the demonstrable potential to be so in the future;
- Sustainability mixed goals: funds that invest across different sustainability objectives and strategies aligned with the other three categories.
What are the benefits of investing in sustainable funds?
There is an argument that sustainable funds can, over the long term, deliver superior returns to alternatives, thanks largely to the fact that they invest in innovative, relatively early-stage companies that are backed by a large-scale, long-term secular trend: the need to decarbonise the economy.
“The long-term tailwinds that helped initially propel sustainable funds and investments still exist,” said Gemma Woodward, head of responsible investment at Quilter Cheviot. “Nations are decarbonising while many companies are still on the path to net zero. These are structural tailwinds that may be buffeted by short-term political noise, but will continue to exist in the next decade and beyond.”
It isn’t certain that sustainable funds deliver on this performance potential, though, and Lamont cautions that “investors should be prepared for extended periods of underperformance, even if excess returns ultimately materialise”.
But money invested into sustainable funds could come back around to promote more economic growth.
According to the International Renewable Energy Agency (IRENA), for every $1 million invested into renewable energy, 7.5 full-time jobs on an average are created, compared to fossil fuels which generate around a third of that number (2.65). Similarly, the World Bank estimates that every pound invested into restoring degraded land generates between £7 and £30 in economic returns.
In other words, you’ll get the money you invest into sustainable funds back in more ways than just their financial returns.
“Despite shifts in sentiment toward ESG – particularly around environmental themes – the need for large‑scale solutions remains acute. Some investors may view sustainable funds as a way to support the transition to a lower‑carbon economy, while others may be motivated by purely commercial opportunities tied to that transition,” said Lamont.
“Recent geopolitical tensions and structural trends underline this case,” he continued. “The conflicts in Ukraine and the Middle East have highlighted the fragility of fossil‑fuel‑dependent economies; the AI boom is driving a sharp increase in power demand; and rising global temperatures reinforce the scale of the challenges ahead and where there is a need there is opportunity.”
The five best-performing sustainable funds
In the year to 28 April 2026, the top-performing Article 9 (targeting sustainable investments) funds according to Trustnet data were:
Source: FE fundinfo via Trustnet. Data as of 29 April 2026
The best sustainable ETFs
These were the five top-performing Article 9 ETFs in the year to 28 April:
Source: FE fundinfo via Trustnet. Data as of 29 April 2026
The best environmental investment trusts
In the year to 28 April, these are the five renewable energy-focused investment trusts with the highest overall performance:
Source: Association of Investment Companies (AIC). Based on total share price return in the year to 28 April of all investment trusts in the AIC’s renewable energy infrastructure sector.