Global sustainable investment funds experienced record outflows in the first quarter of 2025, with withdrawals of approximately $8.6 billion, reversing a relatively strong quarter of over $18 billion of net inflows in Q4 2024, according to a new report released by ESG ratings, data, and research provider Morningstar Sustainalytics.
For the quarterly report, Morningstar Sustainalytics analyzed activity in the global sustainable fund universe, which encompasses open-end funds and ETFs that, by prospectus or other regulatory filings, claim to focus on sustainability, impact, or environmental, social, and governance factors.
Among the key factors highlighted by Morningstar driving the record withdrawal was the first-ever outflows in European funds to be recorded by the report since at least 2018, when the series began. European inflows have been offsetting U.S. outflows for the past 10 consecutive quarters. Overall, European sustainable funds experienced $1.2 billion in redemptions, with U.S. outflows reaching $6.1 billion in the quarter, according to the report.
In the report, Morningstar said:
“Up to last quarter, European sustainable funds had consistently attracted positive quarterly flows, including in the fourth quarter of 2023, when conventional funds experienced redemptions. In the past quarter, however, for the first time since at least 2018, European sustainable funds suffered outflows, in contrast with the strong inflows registered by their conventional peers.”
The report highlighted several factors to explain the results, with the election of Donald Trump as a key driver, introducing legal risks for companies from the President’s anti-climate and anti-ESG agenda, leading asset managers to become more cautious in promoting ESG credentials and sustainable investment products. More broadly, the report noted that an increasingly complex geopolitical environment has shifted investors’ attention to economic growth, competitiveness, and defense, at the expense of deprioritizing sustainability concerns and climate goals. Morningstar also noted the evolving regulatory agenda and ESG fund landscape in Europe, as well as performance concerns, particularly in sectors such as clean energy, as weighing on investor sentiment.
Despite the outflows, however, total global sustainable fund assets remained relatively unchanged in the quarter, ending Q1 2025 at $3.16 trillion, compared with $3.18 trillion in Q4 2024. Europe accounts for the bulk of sustainable fund assets at 84%, with the U.S. representing only around 10%.
Sustainable fund launches declined as well, slumping to only 54 new sustainable funds introduced worldwide in the quarter, down from 105 in the prior quarter (although Morningstar indicated that it anticipates this figure will be revised higher as additional launches are identified). The report noted that the slowdown in launches reflects a normalization in product development after several years of high growth, as well as increased caution by asset managers around greenwashing concerns and evolving regulations.
In addition to slower fund launches, the report also noted continued activity in sustainable fund rebranding, as asset managers deal with new and evolving regulations, including sustainable fund labeling rules such as the FCA’s SDR in the UK, and ESMA’s ESG fund naming guidelines in Europe, as well as the anticipated review of the EU’s SFDR regulation. The report found that fund rebranding reached a new high in Q1 2025, with around 335 funds with ESG-related terms in their names rebranding in the quarter, including 216 changing a sustainability-related term for another, 116 dropping ESG terms, and three adding ESG terms to their names. Notably, the report found that uptake of the new sustainability labels created under the FCA’s SDR regulation has been slow, with only 94 funds to date, accounting for 20% of UK-domiciled funds claiming sustainability characteristics, adopting one of the new labels.
Hortense Bioy, Head of Sustainable Investing Research at Morningstar Sustainalytics, said:
“The quarter signals a shift, not just in flows, but in how sustainable investment strategies are being perceived and positioned in the market. We’re seeing further signs of consolidation, rebranding activity, and cautious product development, amid an intensifying ESG backlash in the U.S. which is now also noticeably affecting sentiment in Europe. Investor appetite for ESG funds will continue to be tested in the months ahead by an evolving regulatory landscape and mounting geopolitical tensions.”
Click here to access the report.
