Green Funds Go From Red to Black

South Korean boy band sensation BTS’s return isn’t the only comeback story of the year.

Sustainable US funds just had their first quarter of inflows since the beginning of 2022, thanks to demand for energy and one exchange-traded fund in particular. Roughly $3 billion poured into US sustainable mutual funds and ETFs during April, May and June, or about as much as the First Trust Nasdaq Clean Edge Smart Grid Infrastructure Index ETF (GRID) raked in, according to a recent Morningstar report. To be clear, conventional funds without such sustainability marketing or mandates brought in more than 100 times the money. Still, it’s worth noting that not only has the overall bleeding from sustainable funds staunched, but it may be starting to reverse.

“This is a next-generation story as much as it is anything else,” said Peter Krull, director of sustainable investing at Earth Equity Advisors. “This is where the money is going to flow at some point in the near future … If you are a financial advisor and you don’t have a legitimate sustainable investment option, that next generation is going to go elsewhere.”

The Power of Infrastructure

The nearer-term story is about infrastructure, he said. That was evident from the wake of Hurricane Helene in 2024, which devastated Krull’s home of Asheville, North Carolina. Many residents didn’t have potable water for the better part of two months because of broken supply lines. And extensive damage to Interstate 40, which is still being repaired, cut off a supply chain corridor, causing serious economic harm, Krull noted. “We simply weren’t ready for a storm of that intensity.”

And the aging US power grid, stressed increasingly by electricity demands from artificial intelligence data centers, further highlights the needs to update the country’s infrastructure. That helps show why demand for GRID has recently outpaced other ETFs in the wider sustainability category:

• The fund has climbed nearly 15% this year, compared with a gain of about 9% for the S&P 500.
• It’s also part of a trend toward passive management in sustainable investing. Index ETFs in the category took in a net of $6.5 billion during the second quarter, compared with about $3.6 billion that flowed out of active strategies, per Morningstar’s report. 
• Now, half of the $400 billion in sustainable US fund assets is in passives, putting index funds in the category on course to overtake actives for the first time.

Value vs. Values: More than 90% of investors globally said they were interested in sustainable investing, according to a Morgan Stanley survey earlier this year. Overwhelmingly, the top reasons are at least in part due to the potential for investment returns, with just 13% saying they would choose sustainable funds to align with their personal values. Clients “want portfolios that actually have solutions in them that are more well-thought-out than just, ‘Do I pick the company with the best ESG score in this particular sector,’” Krull said.