Investors Shy Away from Sustainable ETFs. Energy Demands May Change That

Sustainable strategies don’t guarantee sustainable flows.

Investors pulled $21 billion last year from US mutual funds and ETFs with sustainable investment strategies, a record pace that just surpassed the previous high of $20 billion in 2024, according to a recent Morningstar report. By comparison, the broader world of US mutual funds and ETFs brought in $760 billion in 2025. The slow drain from sustainable funds follows a widespread pullback from the category that started several years ago, marked by strong fossil fuel market performance at the beginning of Russia’s invasion of Ukraine and a long-running campaign by the political right against environmental, social and governance criteria.

“While there are non-financial considerations that folks have on all sides about sustainable funds, generally investors position their portfolios based on what they expect from the market,” said Morningstar Associate Director Alyssa Stankiewicz, an author of the paper.

Energy Drain

As demand for sustainable funds has waned, asset managers have pulled backfrom them. In some cases, that has meant changing product names and/or removing sustainable investing considerations. In others, it has meant closing and liquidating funds or merging them with products that don’t have sustainable mandates. One of the most recent examples is Franklin Templeton’s Putnam funds shedding seven sustainable or ESG ETFs:

• The Putnam ESG Core Bond, High Yield and Ultra Short ETFs are closing and liquidating, per a filing Monday with the Securities and Exchange Commission. 
• The Putnam PanAgora ESG International Equity and ESG Emerging Markets Equity ETFs will have the same fate.
• The company is also nixing its Putnam Sustainable Future and Sustainable Leaders ETFs.

Sustain a Bull Market? It’s not all bad news for sustainable investing advocates (this is The Daily Upside, remember?). Despite three years in a row of net outflows for US sustainable funds as a whole, some products, particularly passively managed ones, have attracted assets recently. For example, the First Trust Nasdaq Clean Edge Smart Grid Infrastructure Index Fund (GRID), raked in $2.5 billion last year, with its assets doubling to $5 billion, per the report. That fund has returned 44% over a year and over 4% so far this year. And more demand for power, including for AI and associated data centers, may bode well for clean-energy investments. 
Further, climate-related risks have become central to asset management, and sustainability considerations, by any name, are probably present in a wider range of funds than is apparent at first glance. “The use of ESG factors has become commonplace within conventional investing,” Morningstar’s editorial director of sustainability, Leslie Norton, recently wrote. “A focus on financial relevance is strengthening funds that are explicitly sustainable, and trillions of dollars of assets remain sustainably invested.”