Is Sustainable Investing Dead? No, It’s Taken Root in Conventional Investing

Key Takeaways

• Though sustainable investing inflows are down sharply from their highs, trillions remain invested in sustainable assets.
• Renewable energy has been a bright spot as demand surges for data centers and electrification.
• Practices and themes related to sustainable investing have become part of conventional investing, helping investors address risk.

In 2025, for the first time since Morningstar began tracking environmental, social, and governance-focused funds in 2018, investors yanked money from these strategies. Meanwhile, a blizzard of anti-green and pro-fossil-fuel initiatives from the Trump administration and Republican-led states spurred institutions to abandon climate action groups and steer clear of overt sustainable investments.

However, there are still plenty of signs of life for sustainable investing. Renewables have gone mainstream, thanks to a wider understanding of climate risk. The use of ESG factors has become commonplace within conventional investing. A focus on financial relevance is strengthening funds that are explicitly sustainable, and trillions of dollars of assets remain sustainably invested. Here’s a closer look at key trends that reflect the continued interest in ESG investing.

Renewable Energy Investments Shine

Green energy investments were a bright spot in 2025 and the first two months of 2026, trouncing oil stocks. The Morningstar North America Renewable Energy Index gained 39.3% from the start of 2025 through Feb. 28, 2026, ahead of the broader market’s gain of 18.4% as measured by the Morningstar US Market Index. The Renewable Energy Index’s largest holdings are Darling Ingredients DAR, a renewable diesel manufacturer that’s climbed over 57% in 2026 so far, and GE Vernova GEV, a power generation and renewable provider that has jumped 166% during that time.

Rising demand for data centers and electrification, as well as falling interest rates, are to credit for renewable energy stocks’ strength. Valuations aren’t stretched and expectations have come down to earth, pricing in a more gradual shift to clean energy. There’s a reason Elon Musk wants to build data centers in space—limitless solar energy could fill AI’s power demands.

Then there’s the Iran war. Oil prices are soaring, and energy independence—including that based on renewables and sustainable infrastructure—has become a top priority. After Russia invaded Ukraine in 2022, solar activity in Europe doubled. “For geopolitical reasons alone, the smart move is energy independence—solar, wind, waves, geothermal,” explains Kristin Hull, founder of investment manager NIA Impact Capital.

In the overall sustainable investing universe, only 26% of indexes beat their non-ESG equivalents in 2025, versus 45% in 2024. That decline was caused by mega-cap concentration and other factors, write Rob Edwards and Margaret Stafford of Morningstar Indexes. Yet that’s a feature of active management, which shines brighter when markets correct.

ESG Integration Has Grown Common in Conventional Investing

Incorporating ESG considerations has become a formal process. According to Principles for Responsible Investment, a framework for sustainable investing, roughly 88% of signatories identify and incorporate financially material sustainability and governance classes across major decisions, including asset allocation. The practice is particularly important for bond investors, whose first priority is risk avoidance. ESG integration has “taken root” in conventional investing, says Maria Lettini, CEO of US SIF, the trade group for the US sustainable investing industry.

In the private markets, PitchBook’s annual Sustainable Investment Survey found that 72% of respondents incorporate ESG factors into their investment evaluation and management process. One unnamed private equity manager said that ESG research helps thwart “potential corruption across the supply chain.”

Morningstar’s equity research incorporates ESG factors into its

economic moat ratings

, which assess companies’ durable competitive advantages. The thinking is that companies with good ESG risk management might have more capital—human, political, financial—to create a moat.

Meanwhile, the CFA Institute “encourages all investment professionals to consider material ESG factors … regardless of investment style, asset class, or investment approach.”

At its root, ESG helps assess value that isn’t captured adequately by traditional financial statements. An increasing proportion of company value comes from intangible assets, such as patents and brand reputation. Such qualities accounted for 90% of the S&P 500’s market value in 2020, up from 68% in 1995, according to consultant Ocean Tomo.

Trillions of Dollars of Assets Remain Invested in Sustainable Strategies

Globally, assets invested in explicitly sustainable mutual funds and ETFs tracked by Morningstar total $3.9 trillion. That’s conservative relative to the Global Sustainable Investment Alliance’s estimate of $16.7 trillion worldwide.

Sustainability is also popular with the pension funds and other asset owners atop the investment management food chain. In 2025, 61% of the 500 asset owners in Morningstar’s Voice of the Asset Owner Survey said that ESG considerations go hand in hand with fulfilling their fiduciary duty, up from 53% in 2024.

Going forward, some 49% of institutional investors expect to grow or maintain their sustainable investing market share, according to a Morningstar Sustainalytics survey of institutional investors. Meanwhile, 5,000 institutions collectively managing $140 trillion in assets have signed the PRI. To be sure, not all are sustainable investors, but this is not a dead market.

Investors Act Through Stewardship

Stewardship means keeping track of your investments to create long-term value for clients, including ongoing conversations with companies and proxy voting. Topics of such voting include board diversity, climate risk, executive compensation, and reputational risk to companies.

Though around 95% of investors usually vote alongside management during proxy season, they remain active in conversations with companies. While just 11% of US investments are officially considered sustainable, some 69% of the US market, or about $42.7 trillion, was covered by an active stewardship policy in 2025, according to US SIF. “They’re not necessarily sustainable investors,” says US SIF’s Lettini, but “that’s a lot of conversations around issues relating to sustainability.”

Stewardship has led to real changes in company practices. Some 72% of companies in the S&P 500 disclosed at least one material AI risk in 2025, up from 12% in 2023. Much of this is spurred by conversations with shareholders like Parnassus Investments, which is pushing companies on the responsible use of AI. “What’s material to a company’s performance is material no matter who’s in office,” says Marian Macindoe, managing director, sustainable investment strategy at Parnassus.

Related Links

US Asset Managers Keep Supporting Governance-Related Proxy-Voting Proposals

Proxy Voting: Asset Managers Increased Their Support for Management in 2025

Financial Relevance Is More Important

Materiality, or financial relevance, connects ESG to financial returns. How companies manage ESG risks affects firm value. According to the US SIF survey, some 29% of respondents say that in response to political backlash, they now “focus explicitly on demonstrable financial materiality.”

Last year,for example,Calamos Investment Management bolstered materiality assessments for 60 industries and sub-industries, according to Beth Williamson, the firm’s head of sustainable equity research. Take semiconductors. For Calamos, water usage accounts for 35% of the risk weight, since thirsty chip fabrication plants could face regulatory and operational risk in places like water-stressed Arizona. “That’s simple operational risk analysis,” Williamson says.

Take note that something can suddenly become materialbecause of shifting consumer preferences, like asbestos and opioids. “Society is willing to absorb those externalities, but only up to a point,” says Susanna Gibbons, chief investment officer at the David S. Kidwell Funds Enterprise at University of Minnesota.

Values-Based Investing Has Become More Sophisticated

According to a 2025 Morgan Stanley survey, some 16% of investors globally want to align their investments with their personal values, including supporting faith-based values. Advances in fintech, data, and data science are helping. “Portfolios can now be systematically reengineered to achieve market-competitive outcomes while reflecting specific exclusions, tilts, or priorities,” says John Streur, chief investment officer of all material risk investment strategies at Boston Common Asset Management.

In the future, what differentiates sustainable and conventional investing may simply be duration. “I don’t think sustainable investing is any different from traditional investing,” says Aniket Shah, global head of the sustainability and transition strategy team at Jefferies Group. “It’s more long-term-oriented. That means analysis will focus much more on what businesses will be from Year 10 into perpetuity. So asset allocators who invest in these funds should have longer horizons.”