Global backlash drives worst ESG fund redemptions on record
Investors withdrew an estimated US$8.6 billion in the first quarter of 2025: Morningstar
THE global market for sustainable funds just suffered its worst quarter on record, with redemptions reaching an all-time high, according to a fresh analysis by Morningstar.
Against a backdrop of “geopolitical uncertainty and a growing backlash against ESG,” investors withdrew an estimated US$8.6 billion in the first quarter of 2025, Morningstar said last week. The development marks a “stark reversal” from the US$18.1 billion in inflows in the final quarter of 2024, it said.
Even in Europe, which is by far the world’s biggest market for investments targeting environmental, social and governance goals, ESG (environmental, social and governance) funds saw net outflows, with redemptions of US$1.2 billion.
The first-quarter withdrawals mark the first time European ESG funds have lost money since Morningstar started monitoring the market in 2018.
Overall, the ESG fund market is struggling to find its footing amid an “increasingly complex geopolitical environment” triggered by US President Donald Trump’s return to office, the researcher said.
“The quarter signals a shift, not just in flows, but in how sustainable investment strategies are being perceived and positioned in the market,” Hortense Bioy, head of sustainable investing research at Morningstar Sustainalytics, said in an e-mail accompanying the report.
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“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,” Bioy said. “Investor appetite for ESG funds will continue to be tested in the months ahead by an evolving regulatory landscape and mounting geopolitical tensions.”
Asset managers based in the US are increasingly toning down references to ESG in response to Trump’s attacks on climate-change initiatives and due to legal risks following his executive order targeting DEI (diversity, equity and inclusion), Morningstar said.
The development has led some European investors to question US asset managers’ commitment to climate and sustainability goals.
Meanwhile, market regulators in Europe have been cracking down on inflated ESG claims with new investment requirements being put in place in both the EU and the UK.
The offering of new ESG funds continued to slide in the quarter, with a record low of 54 new funds launched worldwide, Morningstar said. Meanwhile, the number of funds dropping ESG-related terms from their names roughly doubled, to 116. A further 114 were either liquidated or merged, with US fund closures hitting a record high of 20.
“Funds that struggle to attract assets or deliver good returns are increasingly prone to closing down,” Morningstar said in its report. “We view this as a natural evolution of the industry.”
Canada, Australia and New Zealand marked a rare bright spot, with each seeing inflows of around US$300 million, Morningstar said. The global ESG fund market had assets worth US$3.2 trillion in the first quarter, it said.
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