Sustainable investing has been through plenty of challenges of late. After a string of political and social backlashes, the return of a US president who appears to be opposed to creating a more sustainable future, a rise in greenwashing cases and a challenging period of relative performance, sustainable investing has become more demanding and, arguably, more useful.
These days, sustainability-focused investors are less focused on fund labels and more interested in clear and measurable ESG outcomes, appropriate diversification and identifying genuine alignment with the role sustainability funds are expected to play within their portfolios.
First, the bad news.
The easy phase of sustainable investing appears to be over.
It all started a year and a half ago when the funds which had been flowing into sustainable strategies like clockwork not only dried up but started making their way to the exit.
On that note, global sustainable funds recorded $US84 billion in net outflows in 2025, the first calendar year of outflows since Morningstar began tracking the segment in 2018.
-y0owljpr5eww24sx27rv.png?_a=BAMAAAcg0)
This has been happening during a period when the long-term performance advantages of sustainable investing have been less evident. As shown below, the leading global ESG indices have slightly lagged the broader global market over the longer-term timeframes:
So, sustainability as an investment theme hasn’t had fund inflows or momentum on its side for some time now.
This has led to more investors asking the inevitable question: what’s going on here?
In short, sustainable strategies are generally underweight energy, defence and other cyclical sectors that have performed strongly of late, while some clean-energy holdings have been hurt by higher interest rates and valuation compression.
The upshot is that sustainable investing is becoming more selective, and investors are asking better questions.
Like:
Search and compare a purposely broad range of investments and connect directly with product issuers.
In the interests of raising the credibility of sustainability claims, regulatory scrutiny is on the rise.
ASIC defines greenwashing as misrepresenting the extent to which a product or strategy is environmentally friendly, sustainable or ethical. It has warned that misleading claims can distort the information investors need and undermine confidence in sustainability-related products.
This concern is translating into more ASIC action to stamp greenwashing out. In October 2025, they launched civil penalty proceedings alleging that Fiducian Investment Management Services breached its duties and engaged in misleading and deceptive conduct regarding an ESG fund.
This should be helpful for investors as it’s leading to a tightening of expectations around how funds describe their sustainability screens, exclusions, benchmarks and investment processes.
The lesson is that investors should treat ESG claims like any other investment claim.
Read product disclosure statements, check a fund’s portfolio holdings, compare its performance with the relevant benchmark, understand the fees and ask whether a strategy relies on exclusions, engagement, positive screening, thematic exposure or impact measurement.
This information should provide you with the context you need to assess a sustainability strategy. For example, a fund that holds large miners or oil and gas companies may still have a transition or engagement rationale, but that rationale should be clear.
Australia’s mandatory climate reporting regime is another major shift at play.
From 1 January 2025, many large Australian businesses and financial institutions began preparing annual sustainability reports with mandatory climate-related financial disclosures.
This standard is being phased in across three groups, with the largest reporting first and later cohorts beginning from financial years starting on or after 1 July 2026 and 1 July 2027.
ASIC guides that sustainability reports must include climate-related financial information required under the Corporations Act and AASB S2 Climate-related Disclosures.
At this stage, climate is the first and only mandatory component, although other sustainability subjects may be added over time.
This is surely good news for sustainability-focused investors. Better disclosure should gradually improve the raw material used by analysts, index providers and managers.
This information is becoming more relevant all the time. Climate risk can affect insurance costs, asset values, capital expenditure, stranded asset risk, supply chains and regulatory exposure.
Long gone are the days when most sustainable funds were exposed to the same few stocks.
In fact, the widening of the climate change investing opportunity set is one of the biggest themes sustainability-focused investors have to navigate.
Case in point: the International Energy Agency expects investment in clean energy to reach $US1.5 trillion in 2025, around 50% higher than spending on bringing oil, gas and coal to market.
Source: IEA
Solar investment is estimated at $US450 billion, while battery storage investment is forecast at $US66 billion. The IEA also highlights a grid bottleneck, with about $US400 billion spent annually on grids compared with around $US1 trillion on generation assets.
That’s a useful illustration of the more nuanced investment universe available to sustainability investors.
It includes electricity networks, storage, energy efficiency, critical minerals, industrial software, data centre power demand, building upgrades and companies helping heavy industry reduce emissions.
It also explains why many sustainable funds look more diversified than the renewable energy-focused portfolios of the past.
For example, the Janus Henderson Global Sustainable Equity Active ETF seeks exposure to companies whose products and services are aligned with the development of a broader sustainable global economy, while the Pengana WHEB Sustainable Impact Fund invests in a wide range of companies providing solutions to sustainability challenges.
Australia’s sustainable investment market has its own identity.
And it’s expanding. RIAA reported that responsible investment in Australia reached a record $1.6 trillion, with responsible investment assets rising from 36% to 41% of the market in 2023. It also found greenwashing was the top barrier to responsible investment, cited by 52% of respondents.
With the growing portion of funds invested in sustainable strategies, Australian investors have a widening range of sustainable investment options available to them across local equities, global equities, ETFs and managed funds.
Of course, it’s all good and well being informed about sustainable investing, but the question most investors want answered is:
Can I invest sustainably while also generating outperformance?
The performance case for sustainable investing should always rest on financial rather than ethical grounds.
Here’s the theory behind it… Companies with stronger sustainability characteristics should face lower regulatory, litigation, stranded-asset and financing risks, while being better positioned to benefit from structural trends such as electrification, energy efficiency, climate adaptation and resource productivity.
In portfolio terms, the theory suggests this may translate into higher-quality earnings, lower downside risk and exposure to long-duration growth themes.
However, the recent slight underperformance of sustainability strategies versus broader global markets shows that these advantages don’t automatically translate into outperformance.
Future outperformance really depends on one or more of the following three scenarios eventuating:
While none of these scenarios are guaranteed, it’s likely that one or more of them will play out over the long term. As and when that happens, sustainability is likely to resume its role as a structural driver of excess returns.
In the meantime, the quality bias endemic to sustainable investing is likely to help limit the downside risks in upcoming market sell-offs.
The recent reset of sustainable investing toward greater evidence, transparency and portfolio discipline has arguably repositioned this thematic for continued asset growth, and potentially the resumption of outperformance.
So, now’s the time to look beyond fund labels to understand the underlying sustainability strategies. Expect clearer climate data as Australia’s reporting regime matures. Recognise that the energy transition includes grids, storage, efficiency and transition finance, not just renewable generation. Compare fees, liquidity, holdings and benchmarks before assuming any sustainable fund is a suitable replacement for a broad market allocation. And ask yourself: what job is this fund doing in my portfolio?
Investors can best leverage the sustainability opportunity set when armed with real, useful information.
The Fund is a long only, actively managed, global equity fund. The Fund seeks to provide investors with exposure to a diversified global portfolio of companies, whose products and services are aligned to the development of a sustainable global economy.
The Pengana WHEB Sustainable Impact Fund invests in companies with activities providing solutions to sustainability challenges.
Disclaimer: This article is prepared by Simon Turner. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.
-3i6bx8sqjbfe2qcm0orn.png)
-s5c0uf81il26meg3icyx.png)
-5bk99rneoh6q6ud0ea67.png)
-f8oa4fq9aif5m8wvehra.png)
-i6maal4mcg1cpy7514v2.png)
-ral9jq6ak775mpe6zwk9.png)
