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Global sustainable open-end and exchange-traded funds suffered record outflows in Q1 2025, as geopolitical uncertainty and a growing backlash against ESG investing weighed on sentiment.

According to a new paper from research organisation Morningstar, investors withdrew an estimated $8.6 billion, highlighting a stark reversal from $18.1 billion in inflows the previous quarter.

“Europe recorded its first quarter of net outflows since we started tracking this universe, with redemptions totalling approximately $1.2 billion, while US investors pulled capital for the tenth consecutive quarter,” it said.

Asia also saw net outflows, though Canada and Australia/New Zealand attracted net new money.

This is important to fund operations teams as they must learn to be agile as geopolitical trends affect where capital is being placed. Areas such as private markets and ESG-related funds can often be much more labour-intensive for compliance and data teams and therefore movements such as these would require changes to teams.

Funds continue to change

Global sustainable fund assets declined slightly to $ .16 trillion at the end of March, reflecting weakness in the US equity market. 

Product development slowed, with 54 new sustainable funds launched globally. As well as this, rebranding activity surged.

“In Europe, 335 sustainable products changed names, 116 of which dropped ESG-related language,” said Morningstar. “Additionally, 94 products were liquidated or merged. In the US, 20 funds were closed, the highest on record for a single quarter.”

The rebranding was listed as a key factor to watch by Morningstar.

The company said it expected the universe of sustainable funds to intensify ahead of the EU’s upcoming rules on fund naming and anti-greenwashing. 

The changes to naming are a huge issue in the industry. In February we reported that nearly a quarter (23%) of all Article 8 funds remain at risk of greenwashing according to a report – compared to just 3% of Article 9 funds being at risk.

The 2025 ESG and Sustainable Barometer report, by data provider MainStreet Partners, revealed that the proportion of Article 9 funds that have a greenwashing risk has reduced over time.

US outflows have been heavily affected by the swing in rhetoric in the country and the so-called ‘ESG backlash’ that has been present, especially since the election of Donald Trump.

For instance, the Net Zero Asset Managers (NZAM) initiative said in January it would suspend its activities following the departure of several big-name members including BlackRock, the world's largest asset manager.

“The quarter signals a shift, not just in flows, but in how sustainable investment strategies are being perceived and positioned in the market,” said Hortense Bioy, Head of Sustainable Investing Research at Morningstar Sustainalytics.

Bioy did say there were more factors at play here besides just the sustainable areas.

“We’re seeing further signs of consolidation, rebranding activity, and cautious product development, amid an intensifying ESG backlash in the US which is now also noticeably affecting sentiment in Europe,” she said. “Investor appetite for ESG funds will continue to be tested in the months ahead by an evolving regulatory landscape and mounting geopolitical tensions.”

As part of the changes, the report highlighted that the European Commission published, on Feb. 26, 2025, its Omnibus package, proposing major revisions to key sustainability regulations.

These proposed changes would notably scale back the Corporate Sustainability Reporting Directive (CSRD), the EU Taxonomy Regulation, and the Corporate Sustainability Due Diligence Directive (CSDDD).

“The proposed amendments to the CSRD would exempt approximately 80% of the companies currently in scope from reporting obligations,” it said. “This significantly reduces the number of companies required to publish sustainability reports under the existing Non-Financial Reporting Directive—at least until the inclusion of large unlisted and non-EU companies (with an estimated 7,000 companies ultimately remaining in scope).”

This could have further effects on the operations teams of fund operators as they strive to keep up with regulations as well as industry trends.

 

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