Global sustainable funds rebounded to net inflows of US$3.5 billion in the first quarter of 2026, reversing the sharp US$27 billion in outflows seen in Q4 2025. However, total global assets fell 10% to US$3.51 trillion, due to market volatility, and regional trends remained highly divided.

The green finance landscape, according to the latest global report from Morningstar, is experiencing a stark geographical schism. While some regions are aggressively capitalizing on sustainable strategies, others are retreating under heavy political and regulatory friction.

The first-quarter recovery was driven primarily by Europe. Reversing an annual slump, European-domiciled sustainable funds attracted US$9.1 billion in net inflows. This resurgence was driven by a US$24 billion surge into passive strategies, which comfortably offset a US$14.8 billion withdrawal from actively managed funds.

However, in the United States, sustainable funds extended their multi-year streak of net redemptions, with US$4.3 billion outflows. The persistent retreat highlights an ongoing anti-environmental, social and governance ( ESG ) political backlash and regulatory uncertainty.

Interestingly, Vanguard’s FTSE Social Index Fund officially dethroned Parnassus Core Equity as the largest sustainable fund in the US, ending the quarter with US$23.4 billion in assets under management.

Outside the two dominant economic blocs, regional performance remained highly fractured:

• Canada and Australasia: Both bucked the broader redemption trend, logging modest inflows of US$0.4 billion and US$0.3 billion, respectively
• Japan: Faced its 15th consecutive quarter of net redemptions, losing US$180 million, though the pace of outflows slowed dramatically
• Asia ex-Japan: Shed US$1.8 billion in net outflows ( excluding China ), led by heavy redemptions in South Korea and Taiwan. Taiwan’s flagship Cathay Sustainability High Dividend ETF alone bled US$1.0 billion.

Despite the net global influx of capital, the overall value of the sustainable investment pool shrank.

Total global assets contracted from US$3.90 trillion to US$3.51 trillion. This 10% drop, Morningstar says, is attributable to market volatility, weaker equity markets and broader geopolitical uncertainty.

Europe continues to hold the lion’s share, commanding roughly 85% of global sustainable assets.

Concurrently, product development slowed sharply. Only 17 new sustainable funds launched globally during the quarter, a massive drop from 50 in the previous quarter.

Strikingly, zero new sustainable funds were launched in the US, Japan, Canada or Australasia. Asset managers are pivoting away from creating new products, choosing instead to consolidate existing portfolios amid greenwashing concerns and regulatory overhauls like Europe's Sustainable Finance Disclosure Regulation review and the US Securities and Exchange Commission’s shifting rules.

Ultimately, Q1 2026 proves that while investor appetite for sustainability hasn't disappeared, it is becoming increasingly concentrated in policy-supported regions like Europe.