Stockholm (NordSIP) – Signs of a market in crisis are evident in the latest quarterly Global Sustainable Fund Flows report from Morningstar, which analyses activity in a universe of open-ended funds and ETFs that are marketed as integrating impact, sustainability, or environmental, social, and governance (ESG) risk factors.
The sustainable fund market ended 2024 with a relatively positive overall picture featuring net quarterly inflows exceeding $18 billion, despite the US market’s continued backtracking on ESG investing. However, the first quarter of 2025 is headlined by outflows of $8.6 billion, with the European market showing its first net outflow of $1.2 billion, described by Morningstar as ‘modest – yet meaningful.’ According to Morningstar, the European reversal is driven by several compounding factors taking shape both domestically and in North America.
European investors begin mirroring US moves
The US market has been withdrawing from sustainable funds for ten successive quarters, a trend that has accelerated as the new Trump administration clamps down on ESG-labelled activities via presidential executive orders. This appears to have undermined European investors’ confidence in the global consensus and commitment to environmental or social initiatives. Concerns about the potential financial and legal consequences of the unpredictable shifts in the US market is compounding the ongoing uncertainty faced by European investors regarding the European Union’s (EU) regulatory landscape.
Elsewhere, the Asia ex-Japan market also experienced outflows of $900 million in Q1 2025 despite having experienced inflows of $2.8 billion during the last quarter of 2024. Canada’s shifting political landscape saw positive flows of $300 million, reversing a trend that resulted in small outflows in Q4 2024. Australia and New Zealand investors invested a net positive $300 million, having also trusted an additional $400 million to sustainable funds in the last quarter of 2024.
The overall negative trend in the global sustainable fund universe was also reflected in a slowdown in product development and product launches. Stricter EU fund naming regulations that come into full effect in May 2025 have also led to the renaming of several hundred fund products. Morningstar reports that 116 funds have dropped ESG terms from their labelling and marketing materials. The European market is also experiencing a shift at governmental level towards growth, economic competitiveness, and greater defence spending. Sustainability issues seem to have fallen down the political agenda, with ongoing concerns over the perceived watering down of various elements of the Green Deal.
The US’ BlackRock remains by far the largest supplier of sustainability focused fund products with total assets exceeding $400 billion. UBS, Amundi, Swisscanto, and DWS complete the Top five. Nordic asset managers are represented in the Top 20 by Nordea and Handelsbanken at 8th and 14th respectively.
