Sustainable investing gets a breather, but AI and policy divergence bring new risks

Overview

This report is JPMorgan's sustainable investing research team's 2026 mid-year outlook, covering global sustainable fund flows, relative performance, the policy environment, equity themes, fixed-income issuance, and sustainable indices. The core view is that the sustainable investing market has gotten a breather after facing flow pressure, AUM has resumed growth, and the fixed-income side is more resilient; however, whether the equity side can once again attract significant inflows depends on whether relative performance can continue to improve.

Core views

The report argues that the fundamentals of sustainable investing have not reversed, but the market structure is changing. First, sustainable fund AUM reached US$3.8tn, up 3% year to date, but market share fell to 5.6%, showing stabilizing size alongside declining relative share. Second, technology and AI are emerging as the key relative risk for sustainable equity funds: global sustainable funds typically have a European bias and lower technology weights, while AI themes are more U.S.-centric and are now spreading to emerging markets and Japan. Third, global policy still broadly supports the sustainable direction: the EU maintains its 2040 target of a 90% reduction in emissions versus 1990, the UK continues a pragmatic decarbonization path, and the U.S. still provides tax support for baseload power, storage, and nuclear, although regulatory rollback and trade-policy uncertainty remain. Fourth, investment opportunities are concentrated in the grid, batteries, climate adaptation, electrification sovereignty, shareholder activism, U.S. beneficiaries of low-carbon energy demand, and El Niño and storage themes in Latin America and Asia.

Analysis framework

The report uses a cross-asset, cross-region framework that combines top-down and bottom-up analysis: it first examines global sustainable fund flows, asset-class allocation, and relative performance, then overlays JPMorgan strategists' regional and sector allocation views to assess how tilts toward technology, AI, energy, utilities, real estate, and other sectors affect sustainable fund performance; it then distills themes from policy changes in the EU, the UK, the U.S., Latin America, and Asia, and identifies investable ideas through stock screens and credit-issuance analysis.

Methodology notes

• Flow and performance analysisSustainable fund AUM, flows, and relative return framework

  Use assets under management, market share, regional flows, and asset-class performance to judge whether demand for sustainable investing is recovering.

  The report compares flows and performance of sustainable equity and fixed-income funds versus broader market funds, concluding that equity flows have shifted from outflows to neutral and fixed income continues to see inflows.

• Sector allocation analysisCombining strategists' sector views with sustainable fund positioning tilts

  Overlay regional strategists' overweight or underweight views on IT, energy, utilities, industrials, real estate, and other sectors with the common positioning deviations of sustainable funds.

  The report concludes that, excluding IT, sector allocation impact is broadly neutral; however, the relative strength of technology and AI themes may create downside risk for sustainable equity funds that are underweight technology.

• Theme screeningSix sustainable investing stock screens

  Construct investable stock portfolios around trends that may contribute alpha over the next 12 months.

  The report screens the grid, battery supply chain, climate adaptation, EMEA electrical sovereignty, shareholder activism, and U.S. low-carbon winners, with average potential upside of about 20%-51%.

• Policy and regulatory analysisGlobal sustainable policy tour

  Assess the sustainable investing environment through policy changes in the EU, the UK, the U.S., Latin America, and Asia.

  The report distinguishes long-term policy support from near-term execution noise, highlighting the EU's pragmatic decarbonization, the UK's net-zero path, the coexistence of U.S. tax support and regulatory rollback, progress in Brazil's environmental policy, and stronger corporate governance and disclosure across Asia.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Sustainable equity funds

  Core asset class, with flows shifting from outflows to neutral.

  Strengths

  European sustainable equity funds have modestly outperformed the broader European market, and policy and thematic opportunities remain plentiful.

  Weaknesses

  Global sustainable funds are typically underweight technology and may miss the excess returns generated by AI themes.

  Comparison

  Compared with fixed income, sustainable equities are more sensitive to sector allocation and regional style.

  Risks

  If technology and AI continue to lead, sustainable equity funds that are underweight technology may remain under pressure.

• Sustainable fixed income

  Flows are more stable and continue to be positive.

  Strengths

  Performance is positive and broadly in line with the wider market, and sustainable fixed-income funds in Europe and the U.S. continue to see inflows.

  Weaknesses

  Some markets, such as GBP IG, euro high yield, and U.S. GSS issuance, remain relatively weak.

  Comparison

  Compared with equities, fixed income is more stable in both relative performance and flows.

  Risks

  If corporate supply declines or investor demand slows, GSS+ issuance as a share of the market could flatten or fall.

• Euro GSS+ bonds

  A key sustainable bond asset within the credit market.

  Strengths

  Issuance is slightly above its share of the overall market, green bonds account for 90% of issuance, and coverage ratios continue to exceed those of vanilla bonds, indicating resilient investor demand.

  Weaknesses

  Issuance strength so far this year has been driven mainly by the financial sector, and the pace may slow in the second half.

  Comparison

  Compared with GBP IG, euro high yield, and the U.S. market, Euro GSS+ has greater issuance depth.

  Risks

  As SLB share continues to shrink, overall GSS+ issuance may flatten or edge down in the future.

• Grid and electrification value chain

  One of the report's core global investable themes.

  Strengths

  Benefits from electrification, AI-driven power demand, energy security, and grid modernization investment.

  Weaknesses

  Upside is uneven at the single-stock level, and equipment, engineering, and power infrastructure valuations may already reflect part of the expected gains.

  Comparison

  Compared with traditional renewables, the grid theme benefits simultaneously from baseload power, storage, and AI electricity demand.

  Risks

  Permitting, trade policy, rising costs, and project execution delays may affect returns.

• Battery supply chain and storage

  A global theme and a regional opportunity in Latin America and Asia highlighted by the report.

  Strengths

  Related to energy security, renewable integration, and AI power demand, with storage auctions in some regions potentially opening new markets.

  Weaknesses

  The value chain spans raw materials, batteries, equipment, and other links, so cyclicality and price risk are relatively high.

  Comparison

  Compared with pure solar or wind, storage more directly addresses grid stability and capacity needs.

  Risks

  Raw material prices, policy subsidies, trade restrictions, and changes in project economics may affect theme performance.

• Sustainable indices / JSTAR

  An asset tool highlighted in the JPMorgan sustainable index update.

  Strengths

  JSTAR has completed its rebranding and moved to Sustainalytics' current product data, with index governance continuing to advance.

  Weaknesses

  Index replacement, handling of uncovered issuers, and data mapping still require ongoing governance.

  Comparison

  Compared with active funds, index products depend more heavily on data providers, rule transparency, and governance mechanisms.

  Risks

  Changes in ESG data sources, insufficient issuer coverage, or mapping adjustments may affect index performance and traceability.

Key data

• Sustainable fund AUMUS$3.8tnAs of April, up 3% year to date.
• Share of global sustainable fund AUM5.6%Market share continues to decline.
• Share of sustainable assets in Europe84%The vast majority of sustainable assets are located in Europe.
• Share of sustainable assets in the U.S.10%The U.S. is the second-largest location for sustainable funds.
• Equity funds as a share of sustainable assets67%Equity funds account for roughly two-thirds of sustainable fund assets.
• EU 2040 emissions targetReduce greenhouse gas emissions by 90% versus 1990Shows the EU's continued commitment to the climate agenda.
• EU 2030 electrification target32% of final energy consumption electrified23% in 2024.
• China non-fossil energy target25% of total consumption by 2030Covers wind, solar, hydro, and nuclear power.
• China grid capex potentialMore than Rmb 5tnPotential investment during the 15th Five-Year Plan period.
• Average potential upside for the global grid screen20%One of the six thematic screens.
• Average potential upside for the global battery supply chain screen39%One of the six thematic screens.
• Average potential upside for the climate adaptation screen30%One of the six thematic screens.
• Average potential upside for the EMEA electrical sovereignty screen26%Covers electrification, nuclear, autos, and the grid.
• Average potential upside for the shareholder activism screen51%An EMEA regional theme screen.
• Average potential upside for U.S. low-carbon winners28%Benefiting from rising energy demand.
• Share of green bonds in Euro GSS+90%Green bonds still dominate Euro GSS+ issuance.
• Members of the sovereign GSS bond club65The directory shows that sovereign GSS bond issuers continue to expand.

Impact & implications

For investors, the implication of this report is that sustainable investing is no longer just a one-way policy tailwind story; it now requires managing relative performance, sector exposure, and policy execution risk at the same time. On the equity side, the key focus should be the relative return pressure created by underweight exposure to AI and technology, while looking for structural opportunities tied to the grid, batteries, storage, low-carbon energy demand, and climate adaptation; on the fixed-income side, the more suitable focus is the structure of Euro GSS+ issuance, coverage ratios, and diversified integrated utilities that retain renewable-energy exposure within utility credit.

Risks

• Continued outperformance by technology and AI themes could pressure the relative performance of sustainable equity funds that are underweight technology.
• U.S. policy contains noise, including weakened methane regulation foundations, rollbacks of auto and power-plant emissions standards, narrower Clean Water Act protections, and proposed cuts to research budgets.
• U.S. solar and wind face risks from early phaseouts of tax credits, FEOC rules, Section 232 polysilicon investigations, federal land permitting, and AD/CVD legal disputes.
• Euro GSS+ issuance may be flat or modestly lower in the future, and this year's strong issuance has been driven heavily by the financial sector.
• If sustainable equity relative performance does not improve persistently, a meaningful return of fund inflows may be hard to achieve.
• Some themes in Asia and Latin America are affected by El Niño, energy security, storage auctions, regulatory execution, and corporate governance progress, leaving policy implementation uncertainty relatively high.

What to watch

• Whether sustainable equity funds continue to improve versus the broader market.
• Whether overweight trends in AI, technology, and IT sectors in the U.S., Europe, Japan, and emerging markets continue to expand.
• The impact of the EU SFDR 2.0 reform on sustainable product classification and the retention ratio of European equity assets.
• The final rollout of U.S. FEOC guidance, the Section 232 polysilicon investigation, and safe-harbor rules for solar and wind tax credits.
• Progress in Brazil on storage regulation auctions, implementation of the three-stage compliant market, and no-deforestation lending requirements.
• The pace of implementation of non-fossil energy share and grid capex under China's 15th Five-Year Plan.
• Advances in corporate governance, voting disclosure, and ISSB-related disclosure rules in Hong Kong, Korea, Japan, and China.
• Euro GSS+ coverage ratios, the issuance pace of the financial sector, and changes in green bond supply in the second half.