Global ESG Funds Suffer Record Outflows Amid Geopolitical and Regulatory Uncertainty

In the first quarter of 2025, the global ESG funds universe recorded net outflows of $8.6 billion, a record low that marked a sharp reversal from inflows of $18.1 billion in the previous quarter. This decline, recorded by Morningstar Sustainalytics, is particularly notable as it is the first time since 2018 that European sustainable funds have seen a quarter of net redemptions.

Investor confidence wanes as ESG funds face $8.6B in net outflows, driven by U.S. policy shifts, European regulatory challenges, and weak sector performance

European market withdrawals of $1.2 billion contrast with $20.4 billion in inflows in the fourth quarter of 2024. The United States recorded an even sharper decline, with sustainable funds recording their tenth consecutive quarter of outflows, reaching a total of $6.1 billion in just three months. Asia also lost momentum, with redemptions of $918 million, compared to inflows of $2.8 billion in the previous quarter.

The exception was Japan, which, while still recording outflows, saw an improvement compared to the previous quarter, with redemptions falling to less than $900 million from $1.1 billion in the previous quarter.

In stark contrast to these dynamics, smaller markets such as Canada and Australia/New Zealand have shown surprising resilience, recording net inflows of around $300 million each.

The survey also shows that the organic growth rate of the sustainable funds universe in the first quarter of 2025 fell to -0.27% , compared to +0.54% in the previous quarter. The difference appears even more marked when compared to the global funds universe, which showed positive growth of 0.90%, despite a general slowdown in flows, which went from $847 billion to $530 billion.

In this rather turbulent environment, BlackRock continues to maintain its leadership among global asset managers in the sustainable funds sector, with 403 billion dollars in assets under management in mutual funds and ETFs. UBS follows with 179 billion and Amundi with 178 billion.

The causes of ESG funds outflows

European investors’ confidence has been heavily affected by an increasingly uncertain geopolitical environment, further exacerbated by Donald Trump’s return to the US presidency. His openly hostile approach to climate issues and anti-ESG measures, including the well-known executive orders against DEI policies, have had a domino effect also beyond the US borders.

The resulting increase in legal risks has in fact pushed many US asset managers to adopt a more cautious line in promoting ESG strategies, generating hesitation among European investors and calling into question the idea of ​​a global alignment on climate goals.

Further complicating the European scenario is the internal regulatory evolution, which makes it increasingly difficult for operators to maintain a coherent ESG proposal. Finally, regulatory uncertainties are intertwined with the disappointing performance of some key sectors of the ecological transition, such as clean energy, fueling further doubts about the effectiveness of sustainable strategies.

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(Featured image by Ibrahim Boran via Unsplash)

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