Sustainable Bottom Line: Unlike the broader sustainable investing segment, environmental strategies have attracted inflows in most quarters, with a positive $2.6 billion in Q1 2026.
Notes of Explanation: Quarterly net fund flows, sustainable investing categories as defined by ICI Research. Sources: ICI Research and Sustainable Research and Analysis LLC.
Observations:
• Last week, ICI Research released its March 2026 ESG Investing report based on the trade organization’s methodology for classifying mutual funds and ETFs that invest according to ESG criteria. Based on survey results, ICI Research reported that funds investing according to ESG criteria, a segment consisting of 730 funds, experienced a $32.9 billion drop in net assets in March, or 5.2%, to reach $598.2 billion at the end of the month.* This was largely but not entirely attributable to market depreciation in March (stocks and bonds registered declines of almost 5% and 1.8%, respectively) given that net flows were positive–bolstered in March by positive flows into environmental and religious values focused funds. The same two categories posted positive net flows over the entire first quarter of 2026 even as overall net flows were negative.
• Tracking net fund flows since the second quarter of 2022 based on ICI Research data shows that after briefly flashing signs of resilience in mid-2022, U.S. ESG fund flows have spent the better part of four years in persistent outflow territory. The combined total of net flows across all four sustainable fund categories as defined by the ICI remained positive in only two of the sixteen quarters covered here: Q3 2022 (+$1.3B) and Q2 2023 (+$2.0B). Every other quarter recorded net redemptions, with Q1 2024 marking the low watermark at -$7.6 billion — the steepest single-quarter outflow in the dataset that starts as of January 2019. Broad ESG Focus funds, the largest segment, drove that plunge, shedding -$5.5 billion in just three months.
• At the same time, the one consistent exception has been Environmental focus funds. Unlike the broader ESG funds segment as defined by ICI Research, environmental strategies have attracted inflows in most quarters, often sharply so. Q4 2024 alone brought in +$5.2 billion to environmental funds, and Q1 2026 added another +$2.6 billion even as the overall ESG segment continued to experience drawdowns.
• This divergence suggests that investors are not abandoning sustainable investing wholesale but rather they may be rejecting ESG-oriented labels. One often cited reason is that the broad ESG label has become politically toxic in the current U.S. environment. That said, retaining interest in targeted climate and clean-energy mandates suggests that the reason for rejecting ESG-oriented labels may be more nuanced than just their perceived political and ideological baggage. A few alternative or complementary factors, or some combination of factors worth considering, include: (1) Performance and return-chasing. Environmental funds, particularly those weighted toward clean energy infrastructure, grid modernization, and electrification plays have benefited from substantial capital expenditure cycles that are largely independent of U.S. policy sentiment. Further, capital expenditures based on forward-looking capital requirements are likely to reach record levels in the next few years, even as some initiatives slow. Global institutional mandates, European regulatory requirements, and utility-scale investment programs have continued regardless of Washington’s posture. (2) Surveys indicate that interest in sustainable investing continues, however, investors, and in particular retail investors, may still be confused regarding sustainable investing and the sustainable investing approaches employed by mutual funds and ETFs. This is in the absence of clear standards, definitions, reporting frameworks and transparency practices applicable to sustainable investing approaches and their outcomes (this is illustrated, for example, by the varying frameworks and definitions used by ICI Research versus Morningstar. This inconsistency can lead to confusion among investors, hinder comparability of investment products, and reduce trust in sustainable investing claims.). To address these issues, it is necessary to enhance educational initiatives, raise standards, and strengthen reporting and disclosure frameworks. (3) Misconceptions about performance results. While worries about performance trade-offs remain, investors might have anticipated exceptional returns from sustainable investment funds, but results have fallen short of those expectations. (4) Across the universe of sustainable investment funds, product offerings are limited when comparing available sustainable investment funds options to conventional funds, and (5) Regarding fixed income in particular, ESG analysis is credit analysis: relevant and material environmental risks, governance failures, and social instability all affect an issuer’s ability to repay its obligations in full and on time.
*ICI Research classifies ESG funds, a total of 730 funds, into four groups based on the frameworks or guidelines expressed at the forefront of their principal investment strategies sections of fund offering documents. These are:
Broad ESG focus funds are funds that focus broadly on ESG matters. They consider all three elements of ESG (rather than focusing on one or two of the considerations) or may include ESG in their names. Index funds in this group may track a socially responsible index such as the MSCI KLD 400 Social Index.
Environmental focus funds or funds that focus more narrowly on environmental matters. They may include terms such as alternative energy, climate change, clean energy, environmental solutions, or low carbon in their principal investment strategies or fund names.
Religious Values focus funds are funds that invest in accordance with specific religious values.
Other focus funds or funds focus more narrowly on some combination of environmental, social, and/or governance elements, but not all three. They often negatively screen to eliminate certain types of investments.
The ICI framework captures a broader range of funds when compared to Morningstar which reported that at the end of March, the total net assets of 522 sustainable funds stood at $383.3 billion, a difference of $214.9 billion that is, in part, attributable in the treatment of Religious Values Focused funds.
A broader, more expansive definition of sustainable investing is offered below.
Sustainable investing defined
While there is no universally accepted framework and definitions continue to evolve, today sustainable investing refers to a range of overarching investment approaches or strategies. That said, many practitioners agree that these approaches encompass the following strategies that may be employed individually or in combination:
Values-based investing. Also referred to as faith-based investing, socially responsible investing, responsible investing, ethical investing or investing based on a set of morals, the guiding principle is that investments are based on a set of beliefs with a view toward achieving a positive societal outcome. Typically, this approach is executed using exclusions as well as negative/positive screening.
Negative/positive screening or exclusionary strategies. Negative/positive screening is the process of identifying companies or other entities that score poorly or highly on environmental, social and governance (ESG) factors relative to their peers and underweighting or overweighting these in investment portfolios. On the other hand, an exclusionary strategy refers to the exclusions of companies or certain sectors from portfolios based on specific ethical, religious, social, environmental or governance guidelines or preferences. Traditional examples of exclusionary strategies cover the avoidance of any investments in companies that are fully or partially engaged in gambling and sex related activities, the production or manufacturing of alcohol, tobacco or firearms, or even atomic energy. These exclusionary categories have been extended in recent years to incorporate additional considerations, for example, firms that are the subject of serious labor-related actions or penalties by regulatory agencies or demonstrate a pattern of employing forced, compulsory or child labor, or firms that exhibit a pattern and practice of human rights violations or are directly complicit in human rights violations committed by governments or security forces, including those that are under US or international sanctions for grave human rights abuses, such as genocide and forced labor. That said, it should be noted that significant policy shifts and investor sentiment are taking place in North America and Europe regarding the treatment of nuclear energy and the defense sector, driven by recognition of nuclear energy’s role in meeting the dual goals of energy security and net zero emissions while the war in Ukraine has been responsible for shifting the perception and interest among institutional investors in the defense sector.
Closely related is the strategy of divestiture or divestment. Divestiture strategies involve current holdings that are liquidated over time as their eligibility is no longer consistent with the owner’s objectives, such as fossil fuel companies. But divestiture strategies may also involve a much broader universe of securities, such as when for example, divestiture strategies were applied to apartheid practices in South Africa in the 60s and 70s. At that time, any company doing business with South Africa was taken off the list of eligible investments.
Impact investing. Still a relatively small but growing slice of the sustainable investing segment, impact investments are incremental (additional) moneys directed to companies, organizations, and funds with the intention to achieve measurable social and environmental impacts alongside a financial return. Impact investments can be implemented in both emerging and developed markets and made across asset classes, such as equities, fixed income, venture capital, and private equity. In each instance, the objective is to direct capital to address challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services, including housing, healthcare, and education.
Historically, impact investments have targeted a range of returns from below market to market rate, depending on the investors’ strategic goals. But increasingly, impact investing strategies are expected to at least achieve risk-adjusted market rates of return.
A more widely practiced yet less rigorous definition of impact investing involves providing direct exposure to issuers or projects that managers believe have the potential to achieve social or environmental benefits.
Thematic investing. An investment approach with a focus on a particular idea or unifying concept, for example securities or funds that invest in solar energy, wind energy, clean energy, clean tech and even gender diversity, to mention just a few of the leading sustainable investing fund themes. Investing in low carbon emitting stocks and bonds or green bonds or funds also fall into the thematic investing category.
ESG integration. This is a widely practiced (some data suggests the most widely practiced) investment approach by which environmental, social and governance factors and risks are systematically analyzed and, when these are deemed financially relevant and material to an entity’s performance, they will influence decisions on whether to buy or hold a security, and to what extent. Such considerations may lead to the liquidation of a security from the portfolio but at the same time, these factors may also identify investment opportunities.
Shareholder advocacy, issuer engagement and proxy voting. These strategies, which leverage the power of stock ownership in publicly listed companies and, regarding engagement, the power of bond investments, are action-oriented approaches that rely on learning about each company’s ESG practices and related risks and opportunities. These strategies also extend to influencing corporate behavior through direct corporate engagement, filing shareholder proposals and proxy voting.
Structural sustainability. The scope for expressing sustainability objectives through security selection or ownership rights in money market funds is inherently limited by regulatory requirements and liquidity mandates. As a result, many sustainable money market fund offerings pursue sustainability objectives through structural mechanisms that operate outside traditional portfolio construction, such as inclusive intermediation practices (e.g., broker-dealer selection and distribution partnerships) and the allocation of adviser revenues to charitable or social purposes. In this analysis, such approaches are characterized as forms of “structural sustainability,” reflecting their focus on market processes and economic flows rather than on portfolio composition or issuer engagement.
Updated 3/25/2026
