Canada Defies Global Decline in Sustainable Fund Investments

The global sustainable investment market took a tough hit in early 2025, with mutual funds and exchange-traded funds (ETFs) with ESG orientation experiencing heavy outflows. Global sustainable funds experienced net outflows of US$8.6 billion in Q1 2025, an all-time reversal of the US$18.1 billion net inflows in the prior quarter, as released by Morningstar Sustainalytics. This is evidence of weakening demand for ESG funds, especially in the United States, where more than US$6 billion was withdrawn during the quarter. This was the tenth straight quarter of U.S. outflows.

Europe also saw its first net sustainable outflows from funds since 2018, which again indicated the reversal of global investor sentiment. Asia also recorded the same patterns, which indicated an across-the-board rethinking of ESG strategies in some of the prime geographies.

Amidst global slowdown, Canada has been a remarkable exception. Canadian sustainable funds attracted net positive inflows of nearly US$300 million in the same quarter, so did Australasia, which includes Australia and New Zealand. The two regions are contrasted with the general market pullback and point to more stable commitment toward sustainable investment behaviors.

Among the most significant causes of this divergence is the departure of fund providers who entered ESG on the basis of short-term agendas. Such companies, typically categorized as "ESG tourists," were less interested in establishing firm, long-term strategies or bases and more interested in taking advantage of the current trend for ESG investing. Their departure left behind a core of companies that continue to be committed to ESG ideals and goals.

In Canada, this center is manifested in institutions such as NEI Investments, Desjardins, and National Bank. The three firms collectively owned more than half of Canada's sustainable fund assets as of 2024. They prefer to work together with credit unions and stand-alone advisers who have a greater focus on aligning the investment goals of their clients with ESG.

A second driver of Canada's success with sustainable investing is the structure and culture of its system of financial advisers. Canadian advisers tend to be more education-based and client-focused compared to other advisers in other markets, where regulatory requirements might necessitate ESG inclusion. This approach fosters knowledge-based choices and long-term trust in ESG products.

While the broader market has been defensive, fund flows have continued to be driven by performance. While most ESG equity funds, especially cleantech and renewably focused funds, have lagged over this cycle of high rates and market volatility since 2022, Canadian investors have turned towards fixed income products.

Sustainable fixed income funds, which include impact bonds and green bonds, were in good health in the first quarter of 2025. Both the types of bonds invest in certain climate or social objectives and are usually rated as low risk. Canadian fixed-income products accounted for 87% of total sustainable fund flows in the period. It reflects a considered investor decision-making process turning toward solid ESG investments that ongoing drive measurable sustainability metrics.

Political considerations have also influenced ESG trends. Politicalization of ESG investment has taken place in the United States, which has seen resistance to regulation and disapproval by institutions. Canada has been relatively apolitical in its approach to ESG, with a more standardized implementation and growth of sustainable investment.

Europe, having been the ESG leader for several years, is now beginning to tire. Volatility in markets and heightened regulatory scrutiny might have discouraged investors from participating. Yet long-term involvement in markets such as Canada presents a counterpoint to these worldwide trends.

Canada's stability in the ESG field reflects an advanced and focused sustainable finance approach. Clearing short-term participants has arguably consolidated the market, rationalized it, and made it effective. Unlike having aggressively grown with low-quality products, Canada is focused on aligning around higher-quality product offerings by competent providers and knowledge investors.

The shift into bond funds is also indicating that investors are valuing stability and real-world effect over near-term equities returns. It may lead the way to further innovation in the sustainable fixed-income market, as demand for investments that boost both financial and ethical objectives remains strong.

Though global interest in ESG investing has waned, the ongoing Canadian market lead indicates that sustainable investing is not a fleeting trend but a maturing practice guided by experience, governance, and investor education. While the global marketplace reconsiders the future of ESG, the Canadian model provides a more sustainable and long-lasting direction.

Source: Corporate Knights