European Union (EU) ESG funds adhering to the bloc’s strictest sustainable investment regulations saw record withdrawals in the final quarter of 2024, as investors increasingly pivoted towards conventional equity strategies.
According to Morningstar Inc., redemptions from Article 9 funds—which are required to invest primarily in sustainable assets—reached €7.3 billion ($7.6 billion) in Q4 2024. This figure represents more than double the outflows recorded in Q3 and marks the fifth consecutive quarter of withdrawals.
“In 2024’s bull market, investors simply preferred conventional equity strategies,” said Hortense Bioy, Head of Sustainable Investing Research at Morningstar Sustainalytics.
The downturn in sustainable investing comes amid growing concerns over weak financial returns,, regulatory uncertainty and political and market shifts. The S&P Global Clean Energy Index has lost 50% of its value since early 2022, while the S&P 500 Index has surged nearly 30% in the same period.
Meanwhile, the EU’s Sustainable Finance Disclosure Regulation (SFDR) is undergoing a major overhaul, with investors criticising its complexity and ambiguity. Additionally, with former US President Donald Trump advocating a deregulatory wave in the world’s largest economy, businesses are questioning the competitive impact of stringent EU sustainability regulations.
As concerns over burdensome ESG regulations grow, European policymakers are under pressure to ease disclosure rules for sustainable finance. The European Commission is reviewing SFDR after complaints from investors and regulators about its lack of clarity. Germany and France have urged the EU to scale back ESG reporting requirements, citing the risk of overregulation and investor fatigue.
Also, the Platform on Sustainable Finance, an advisory body to the EU, has proposed new fund classifications to help investors distinguish between sustainability-focused investments, net-zero transition strategies, and exclusion-based ESG categories.
Morningstar’s analysis shows a clear divide in investor sentiment. Article 9 equity funds saw €6.4 billion ($6.6 billion) in outflows—the biggest decline among ESG products.
Article 8 funds, which have a broader and less stringent ESG classification, recorded €52 billion ($54 billion) in inflows, driven mainly by fixed-income investments.
