ESG Funds See Record Outflows In Q1 2025 Amid Shift

In a dramatic reversal of the recent trend, global sustainable investment funds suffered record outflows in the first quarter of 2025, as investors withdrew around $8.6 billion from these funds. The decline represented a dramatic reversal from the fourth quarter of 2024, during which there were net inflows of more than $18 billion, as there was a dramatic shift in investor attitudes toward environmental, social, and governance (ESG) funds. The results were presented in a new quarterly report by ESG research and ratings firm Morningstar Sustainalytics, which examined global trends among open-end funds and ETFs that specifically highlight sustainability or ESG considerations in their regulatory filings.

The highlight of the recent report is that Europe, traditionally the cornerstone of ESG investing, experienced net outflows for the first time since Morningstar started following this metric in 2018. Although Europe has always served as a counter to plummeting sentiment in the United States—countering U.S. outflows for ten straight quarters—it posted redemptions of $1.2 billion in Q1 2025. At the same time, U.S.-domiciled sustainable funds suffered a precipitous drop, losing $6.1 billion over the same quarter. This was a turning point, implying the fading supremacy of ESG fervor even in historically robust markets.

Morningstar reported that while European sustainable funds held up well during previous economic and market downturns—even beating out traditional funds in some periods—the current trend is fueled by a mix of political and regulatory headwinds. The United States election of Donald Trump was indicated as a strong impetus, bringing legal ambiguities for firms marketing ESG projects in light of the President being outwardly anti-ESG and anti-climate. This has, subsequently, caused asset managers to use greater prudence in advertising sustainable investment products and qualifications.

Aside from political issues, the wider geopolitical environment has also pushed investors to re-prioritize. Economic competitiveness, national defense, and geopolitical security have become more important priorities than sustainability and climate objectives. Morningstar is of the opinion that this shift in focus has also been worsened by increased concern over the performance of ESG funds, especially those predominantly invested in clean energy and similar areas, which have performed worse over the past few months.

Contrary to the unprecedented outflows, overall global sustainable fund assets under management were roughly stable at Q1 2025's closing value of $3.16 trillion, modestly lower from Q4 2024's closing value of $3.18 trillion. Europe remains ascendant in ESG, covering 84% of global sustainable fund assets under management, leaving the United States in second position, with the U.S. contributing only roughly 10% of global assets under management within sustainable funds.

Another sign of the slowing ESG environment is the deceleration in new sustainable fund launches. Just 54 new funds launched worldwide in Q1 2025, down precipitously from 105 in the last quarter. Though Morningstar anticipates the number to rise somewhat as more data are reported, the initial reading signals an unambiguous slowing of momentum. This fall is both a natural normalization following years of high growth and increased prudence by asset managers concerned about greenwashing accusations and dealing with sophisticated and changing ESG regulations.

At the same time, the market is seeing an explosion of sustainable fund rebranding activity. Morningstar documented that 335 funds changed ESG-related language in their names in the first quarter alone. Of these, 216 replaced one sustainability-related term with another, 116 eliminated ESG references entirely, and just three included ESG terms within fund names. This rebranding wave follows in the face of tightening rules, including the UK Financial Conduct Authority's Sustainable Disclosure Requirements (SDR) and the European Securities and Markets Authority's advisory on ESG fund nomenclature. Adoption of the new SDR labels has been sluggish, with just 94 UK-domiciled funds—about 20% of those with sustainability characteristics—adopting one of the new labels.

Hortense Bioy, Morningstar Sustainalytics' Head of Sustainable Investing Research, said in response to the report's findings that the quarter is more than a change in fund flows. According to Bioy, it illustrates a deeper realignment in how sustainable investing is positioned within financial markets. “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,” she said. She noted that investor appetite for ESG funds will remain under scrutiny in the months ahead, driven by continued regulatory refinements and geopolitical uncertainty.

While ESG funds ride out this volatile stretch, the next few quarters should provide clarity on whether the recent pullback represents a short-term response to external factors or the start of a more sustained reset of sustainable investing approaches.