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Investing.com -- Clean energy funds have staged a sharp comeback this year after three years of underperformance, lifted by surging power demand, record renewable installations and a broader investor shift toward transition-linked assets, according to Bank of America.
Despite almost $100 billion of outflows from global sustainable equity funds in 2025, total assets still climbed to $2.2 trillion on the back of market gains. Clean energy strategies were among the strongest performers, returning an average of 24 percent, with some funds rising more than 70 percent.
BofA said the rally has been powered by rapid growth in renewable capacity and the jump in electricity use driven by artificial intelligence, which has boosted demand for storage, solar and supply chain stocks.
The rotation has coincided with a sharp drop in traditional energy holdings and a notable increase in exposure to defence names as national security considerations move into mainstream sustainability frameworks.
Flows are also shifting to more targeted transition vehicles. Thematic equity ETFs drew $50 billion this year, led by funds focused on AI, defence and infrastructure. Nuclear, hydrogen and transition metals strategies have risen more than 50 percent, while Asia-Pacific transition funds led global performance, helped by fast deployment cycles and deep regional manufacturing capabilities.
Regulation is set to accelerate the trend. Europe’s sustainable fund regime is heading for an overhaul under SFDR 2.0, which introduces a dedicated Transition category alongside Sustainable and ESG Basics. The changes will impose thresholds and exclusions that BofA expects to spur widespread reclassification and drive capital toward funds with verifiable decarbonisation pathways. Implementation is expected between 2027 and 2028.
BofA said the shift will benefit utilities, infrastructure operators, renewable developers and industrial equipment makers in the Stoxx 600 that show green revenue exposure and alignment with Paris benchmarks. It warned that more than $40 billion across eight stocks could face selling pressure if existing Article 9 funds are forced to exit positions that no longer meet stricter sustainability requirements.
The bank added that policy momentum from the opening of COP30, including a proposed global public climate finance goal of $300 billion a year and new industrial decarbonisation commitments, reinforces the case for continued rotation into transition assets through 2026 and 2027.