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After a challenging start to the year, global ESG funds saw a sharp recovery in the second quarter of 2025, according to Morningstar’s latest report. Despite continued regulatory uncertainty and rising geopolitical tensions, ESG funds recorded net inflows of $4.9 billion during Q2, reversing the $11.8 billion in redemptions seen in Q1.

The recovery was mostly driven by Europe, where investors added $8.6 billion to ESG funds, a sharp turnaround from the $7.3 billion they pulled out in Q1. 

This is important to fund managers as it shows ESG policies could still have a place going forward despite much doom and gloom.

“Despite the ESG backlash and the volatility sparked by geopolitical tensions and US tariffs, the picture for ESG funds improved last quarter,” said Hortense Bioy, Head of Sustainable Investing Research at Morningstar Sustainalytics. “European investors have returned to ESG funds, marking a notable reversal from the redemptions seen in the previous quarter.”

Diverging trends across regions

While Europe led the rebound, ESG sentiment in the United States continues to deteriorate. Investors there pulled $5.7 billion from ESG funds in Q2, the eleventh consecutive quarter of outflows. In contrast, ESG funds across the rest of the world attracted $2 billion, suggesting that the appetite for ESG remains intact in several key markets outside the US.

This contrast points to ongoing political and regulatory differences. ESG investing in the US continues to face pushback, while European regulators are moving forward, although with tighter rules.

US backlash against ESG funds continues, but has taken on different elements as there is now somewhat of a backlash against the original drop in interest. The politicisation of the decisions has seen many try to assert their continued attraction to the principles of ESG.

California, for instance, is still issuing green bonds.

For instance, one of Japan’s major pension funds has made overtures around ESG investing in recent weeks.

Regulatory shift driving fund changes

One of the biggest developments this quarter was a wave of fund rebranding in Europe. Nearly 600 funds changed names in Q2 alone, as managers rushed to comply with new ESMA guidelines on ESG fund labelling. In total, over 1,300 funds, covering $1 trillion in assets, have been renamed in the past 18 months. 

“In the second quarter, asset managers scrambled to meet the May deadline for renaming funds under ESMA’s guidelines, leading to a record number of name changes,” Bioy said. “Notably, the majority of funds removed the acronym 'ESG' or related terms entirely from their names. However, many opted to replace these with alternative terms that still signal differentiation and, in practice, continued consideration of ESG factors.”

The rebranding exercise does not appear to have significantly altered the investment strategies, but it does reflect increased regulatory scrutiny and the push for clearer disclosure around ESG claims. 

Product development and label uptake 

There were also signs that interest in ESG is growing again. There were 72 new ESG funds launched globally in Q2, helped by a new government-backed incentive scheme in Thailand. In the UK, 110 funds have now adopted the Financial Conduct Authority’s sustainability label, covering $62 billion in assets, or about 20% of UK ESG funds. 

Global ESG fund assets rose by 10%, reaching $3.5 trillion, supported by both inflows and rising stock markets. 

Looking ahead 

Despite continued uncertainty, especially in the US, ESG investing still remains a key part of many portfolios and monitoring legislation and market moves an integral part of good fund management. While investors may be adapting to new rules and shifting attitudes, the data shows sustainable strategies are far from being left behind.

 

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