Targeted approach gains traction amid headwinds
The sustainable investing landscape has entered a period of turbulence as investors confront political pressures and performance challenges. While 2025 has seen renewed outflows from sustainable equity funds generally, a more nuanced picture emerges when specific investment approaches are considered.
Climate transition equity funds – which can invest in both solution providers and companies changing their business models toward a lower-carbon economy – are showing greater resilience than their broader ESG counterparts. These funds benefit from increased diversification across sectors, allowing them to own a wider range of companies than traditional clean technology funds.
"The areas with flows that have been most challenged are those with the toughest performance track record," explains Sarah Mahaffy, Head of Global Sustainability Strategy Research at RBC Capital Markets. "For climate transition equity funds, the flows have held up a little bit better because they tend to be more diversified from a sector perspective."
This trend reflects a broader shift towards more targeted, thematic approaches to sustainable investing. Asset owners appear to be pulling out of general ESG funds in favor of focused climate transition investments, suggesting a preference for precision over broad-brush sustainability mandates.
While equity-based sustainable funds face headwinds, sustainable fixed-income funds have enjoyed steady inflows, with their share of total fixed income assets under management continuing to reach new highs.
“The policy backdrop is rapidly evolving in terms of the stances being taken towards nuclear.”
Sara Mahaffy, Head of Global Sustainability Strategy Research, RBC Capital Markets
Nuclear renaissance?
One of the most significant policy shifts involves the treatment of nuclear power. Both North American and European sustainable funds are increasingly dropping long-standing exclusions against nuclear investments, driven by growing recognition of nuclear's role in meeting dual goals of energy security and net zero emissions.
The policy pivot reflects rising bipartisan support for nuclear power in the United States. Recent executive orders from the Trump administration aim to quadruple nuclear power capacity by 2050, underscoring continued policy support despite broader political changes.
"What's been interesting to me in our work more recently has been the loosening of exclusions in Europe, where European sustainable funds are also dropping exclusions towards nuclear power," notes Mahaffy. "The policy backdrop is rapidly evolving in terms of the stances being taken towards nuclear."
Despite these policy changes, most nuclear companies remain relatively lightly owned within sustainable fund portfolios, suggesting significant room for ownership levels to increase.
Energy security drives fossil fuel rethink
Energy security concerns are also prompting changes to fossil fuel exclusion policies, particularly in Europe where such restrictions became widespread following sustainable investing regulations, cites Mahaffy. Currently, more than half of European conventional funds have baseline exclusions in place, which can include fossil fuels.
However, energy security concerns are prompting some pullback from these blanket restrictions, potentially signaling a broader shift away from simple divestment towards "transition investing" approaches that engage with companies to support their transformation.
"This proxy season is the first year since 2021 where corporate governance related shareholder proposals are outnumbering those proposals focused on environmental and social issues."
Sara Mahaffy, Head of Global Sustainability Strategy Research, RBC Capital Markets
Governance makes a comeback in proxy voting
The proxy voting landscape is seeing notable shifts, with traditional corporate governance issues regaining prominence over environmental and social proposals. For the first time since 2021, corporate governance-related shareholder proposals are outnumbering those focused on environmental and social issues.
Issues such as shareholder rights and executive compensation are rising in focus, benefiting from their less controversial nature and historically higher support levels. However, certain environmental and social proposals continue to receive strong backing, particularly those focused on political lobbying activities and transition finance.
"Governance topics just tend to be less controversial, and the support levels for these proposals have been near record highs in recent years," observes Mahaffy. "It's become much more company-specific in terms of the support levels that these proposals will garner."
Grid resilience emerges as top investment theme
Among energy transition investment themes, grid resilience has emerged as a standout opportunity, ranking at the top of Mahaffy's thematic scorecard despite elevated valuations. The theme encompasses companies supporting grid infrastructure including transmission, distribution, smart grid technologies, and power storage.
The appeal stems from strong earnings and quality profiles, with the theme showing some of the best earnings revision momentum among tracked themes. Long-term growth expectations continue trending higher, supported by ageing infrastructure, extreme weather resilience needs, renewable energy integration, and growing electricity demand from data centres and electrification.
"The theme has one of the best earnings revisions momentum profiles among the themes that we're tracking," says Mahaffy. "The higher quality profile of the theme has made it a little bit more resilient to the higher interest rate inflation backdrop that we've seen the last couple of years."
While elevated valuations represent the main risk factor, the strong fundamental profile and long-term growth drivers help justify the premium. From a policy perspective, the administration's focus on energy dominance and potential permitting reform provide supportive tailwinds.
The evolution of sustainable investing continues to reflect the complex interplay between policy, performance, and investor sentiment, with targeted approaches and energy security considerations increasingly driving allocation decisions.
