Global sustainable investment funds experienced a historic setback in the first quarter of 2025, with net outflows reaching $8.6 billion, new data from Morningstar Sustainalytics has revealed. The retreat, attributed primarily to the Trump administration’s ESG policies, marks the highest quarterly redemptions recorded for sustainable open-end and exchange-traded funds (ETFs).
This reversal follows $18.1 billion in inflows in the final quarter of 2024, highlighting the severity of the downturn. Outflows were driven by continued withdrawals in the United States and an unexpected reversal in Europe, compounded by regional declines across Asia, including Japan.
The report cites political headwinds, regulatory uncertainty, and diminishing investor confidence in ESG’s long-term prospects as the principal causes.
The United States recorded its tenth consecutive quarter of outflows, losing $6.1 billion between January and March. Meanwhile, Europe posted net outflows of $1.2 billion—the first since Morningstar began tracking the data in 2018. Asia (excluding Japan) saw redemptions totalling $918 million, with Japanese funds experiencing slightly lower outflows, below $900 million.
Only Canada, Australia, and New Zealand registered inflows, each attracting approximately $300 million.
The fallout was also evident in growth rates. The organic growth rate for global sustainable funds fell sharply to -0.27% in Q1, down from +0.54% in Q4 2024. By contrast, the broader global fund universe posted a healthy growth rate of 0.90%, buoyed by $530 billion in total inflows.
Hortense Bioy, Morningstar Sustainalytics’ head of sustainable investing research, commented: “The quarter signals a shift, not just in flows, but in how sustainable investment strategies are being perceived and positioned. Investor appetite for ESG funds will continue to be tested by an evolving regulatory landscape and mounting geopolitical tensions.”
Europe, once the leader in ESG investment, also witnessed a reversal. In Q1 2025, European-domiciled sustainable funds saw net outflows of $1.2 billion. Active strategies bore the brunt, shedding $5 billion, while passive ESG funds attracted $3.7 billion—an all-time low, representing a 72% decline from the previous quarter.
The report notes that the return of Donald Trump to the White House has reshaped the global political landscape, with renewed scepticism towards climate and diversity policies extending to Europe. Heightened legal risks for US-based firms and a more cautious tone from global asset managers have fuelled investor wariness across the Atlantic.
Furthermore, Europe’s evolving ESG regulatory frameworks, such as the European Commission’s recent ‘Omnibus’ package, have increased uncertainty, leading to a loss of confidence in ESG as a coherent investment strategy.
The retreat is further reflected in widespread fund rebranding. In Q1 alone, more than 180 European funds removed terms such as “ESG,” “sustainable,” or “sustainability” from their names, with passive strategies accounting for the majority of removals.
Since early 2024, over 640 funds—around 14% of Europe’s sustainable fund universe—have rebranded, often replacing politicised terms with alternatives such as “screened,” “transition,” “climate,” and “committed.”
The UK’s new Sustainability Disclosure Requirements (SDR), which came into force in April 2025, have also contributed to the reshaping of the landscape. So far, only 94 UK-domiciled funds have adopted one of the four official sustainability labels, covering $47 billion in assets, while a larger number—376 funds—have opted to provide consumer-facing disclosures without formal labels.
About half of these non-labelled funds continue to reference ESG-related language, indicating a cautious but deliberate shift in marketing strategies.
