USD84 billion drained from global sustainable funds in 2025, with investors spooked by geopolitical tensions, anti-ESG sentiment, regulatory uncertainty and mixed performance, according to figures from Morningstar Sustainalytics.
2025’s outflows from ESG funds are a notable change of fortune from the USD38billion in inflows recorded in 2024 and mark the first year of annual redemptions since Morningstar began tracking the segment in 2018. It was also the first year of outflows for Europe and the rest of world, while being the third for the US.
Disappointing performance was a contributing factor in withdrawals from sustainable funds, with only 26 per cent of ESG indexes outperforming their non-ESG equivalents last year. This compares with 45 per cent in 2024.
Morningstar attributes mega cap concentration, strong returns from carbon intensive sectors and underexposure to defence as contributing factors to lower returns in sustainable funds.
Hortense Bioy, head of sustainable investing research at Morningstar Sustainalytics, says 2025 was “undeniably a challenging year” for ESG and sustainable investing, noting that geopolitical tensions, ESG backlash, and uneven policy progress had all served to undermine the strategies.
“The incoming US administration marked a turning point with its explicit anti-ESG stance and shift toward deregulation. This, in turn, prompted Europe to scale back its ambitions related to sustainability-related disclosure regulations and to prioritise its growth and competitiveness. In this volatile political and policy environment, many investors questioned whether companies would stick to their sustainability commitments.”
European-domiciled sustainable funds experienced another quarter of net redemptions, totalling USD 20 billion in the final three months of 2025, following restated record outflows of USD 49.6 billion in the preceding quarter.
However, the figures belie a “substantial share” of the outflows over the past two quarters from large UK institutional clients – including BlackRock, Scottish Widows, and Northern Trust – that were transferring from pooled ESG funds into bespoke ESG mandates, which are not accounted for in the Morningstar database.
For example, most of the third-quarter outflows were driven by redemptions from four UK-domiciled BlackRock authorised contractual schemes, following a client pension fund’s decision to transfer assets from these funds into BlackRock’s custom ESG mandates. This trend continued in the fourth quarter, as Scottish Widows also moved money from a large, pooled fund to an ESG-tilted segregated mandate.
Bioy says: “The ESG fund‑flow picture doesn’t look good, but the figures are somewhat skewed by large European institutional investors reallocating assets from pooled ESG funds into custom ESG mandates. Nonetheless, the wider environment remains challenging, as persistent headwinds, including geopolitical tensions, the ESG backlash, regulatory backpedalling, and mixed performance, continue to weigh on investor appetite.”
In 2025, the Trump Administration began what sustainability consultants SLR calls “a massive rollback” in domestic climate regulations as well as the United States’ support of global initiatives such as the Paris Agreement, WHO, COP30 and the UN Sustainability Development Goals.
Further, SLR says Republican attacks on banks, asset managers and proxy advisers in 2025 over their perceived “politically motivated” climate stances has seen the collapse of the Net Zero Banking Alliance “and a far less vocal investment community in the US”.
However, the consultancy says that companies continue to see the value and importance of climate-related initiatives. Only 8 per cent of companies have rolled back on their ESG commitments while another 5 per cent altered their public messaging while keeping their programs intact. It is expected that 32 per cent of companies are expanding their efforts.
