Sustainable Funds Rebound in Q2 2025 After Q1 Outflows

After a difficult first quarter, global sustainable funds made a marked recovery in the second quarter of 2025, even as they continued to navigate geopolitical instability, regulatory headwinds, and persistent backlash against environmental, social, and governance (ESG) investing. The turnaround, highlighted in Morningstar’s latest report, signals renewed confidence among investors in sustainability-themed strategies, despite the broader uncertainty clouding the global landscape.

Global Inflows Rebound Amid Uncertainty

Net inflows into sustainable funds reached $4.9 billion globally between April and June, reversing the historic $11.8 billion in outflows recorded in the previous quarter. This rebound is particularly significant given the challenging environment that defined early 2025. Investors appeared to recalibrate their strategies in the face of volatility, gravitating once again towards ESG-aligned funds, particularly those offering longer-term value aligned with sustainability principles.

Europe Leads the Comeback in ESG Appetite

The lion’s share of this rebound came from European investors, who injected $8.6 billion into sustainable funds over the quarter. This marks a sharp contrast to the $7.3 billion in redemptions seen in Europe just a quarter earlier. Both actively managed and passive funds benefited from this renewed interest, with active strategies drawing in $4.1 billion and passive vehicles attracting $4.5 billion. The uptick reflects a broader resurgence in ESG appetite across the continent, driven by increasing clarity around regulation and more robust investor protection measures.

Sustainable Assets Climb, Backed by Markets and Innovation

The total global assets in sustainable funds rose by 10% over the quarter to reach $3.5 trillion. This growth was underpinned not just by capital flows, but also by broader market gains and a revitalized product development pipeline. A total of 72 new sustainable funds were launched globally during the period, with some momentum stemming from new regulatory incentives in Asia, including a prominent scheme introduced in Thailand. These launches signal asset managers’ continued commitment to evolving ESG offerings amid rising investor interest.

ESG Sentiment Diverges Sharply Across Markets

Investor behavior continues to diverge significantly between regions. While European markets are clearly warming again to ESG strategies, the United States remains a challenging landscape for sustainability-themed investing. Regulatory hostility and growing anti-ESG sentiment in U.S. political discourse have led several asset managers to take a more cautious stance. In contrast, policymakers outside the U.S. have largely stayed the course, reinforcing ESG frameworks and encouraging market development.

Fund Renaming Surge as European Rules Take Hold

European regulators, particularly the European Securities and Markets Authority (ESMA), have introduced clearer fund naming requirements, prompting a record wave of renaming activity in Q2. Close to 600 funds changed their names during the quarter to comply with ESMA’s guidelines, aimed at reducing greenwashing and increasing transparency. Over the past 18 months, Morningstar estimates that approximately 1,346 European funds, representing $1 trillion in assets, have undergone name changes. These include funds removing, modifying, or adding ESG-related language to reflect their true investment approach more accurately.

UK’s Sustainable Labeling Gains Ground

In the United Kingdom, efforts to introduce an official sustainability labeling system are beginning to bear fruit. Around 110 funds, collectively managing $62 billion in assets, have adopted the new sustainability label. This cohort represents about 20% of UK-domiciled funds that claim to follow sustainable investment principles, marking a significant milestone in the country’s attempt to bring clarity and structure to its ESG fund market.

Sustainable Fixed Income Gains, Equities Stabilize

From an asset class perspective, sustainable fixed income remained the preferred destination for capital among European investors, pulling in $10.1 billion in the quarter. Though slightly lower than the $12.8 billion garnered in Q1, fixed income remains a core component of ESG portfolio strategies. Equity funds, which had experienced sharp outflows of $14.3 billion in the first quarter, saw a marked improvement with redemptions narrowing to $2.4 billion. This suggests a stabilizing investor outlook towards sustainable equities, potentially aided by stronger market performance and better-aligned regulatory frameworks.

Momentum Returns to Sustainable Investing

The second quarter of 2025 stands as a pivotal period in the ESG investment landscape. With Europe firmly back in the lead and global fund flows beginning to recover, the sustainable investment space appears to be regaining its footing. Despite regional divergence and lingering skepticism in some markets, the overall trajectory suggests investors remain committed to the long-term vision of aligning portfolios with sustainability goals, provided there is greater regulatory clarity and market support.