A perfect storm of geopolitical challenges and an intensifying ESG backlash has led investors to pull a record amount from global sustainable funds in the first quarter.
But the state of funds that identify investments based on environmental, social, and governance factors is not entirely clear. The outflows come even as large asset owners, such as New York City’s pension funds, have doubled down on their commitments to sustainable investments amid the contentious debate.
Investors withdrew an estimated $8.6 billion from global sustainable open-end and exchange-traded funds, according to the latest quarterly global sustainable fund flows report from Morningstar Sustainalytics. This is in contrast to the $18.1 billion in inflows experienced in the previous quarter, before President Donald Trump was inaugurated, a flurry of executive orders rolling back environmental regulations, and before his tariff announcements sent markets sliding.
U.S. investors, however, have pulled money out of sustainable funds for 10 consecutive quarters, with withdrawals reaching $6.1 billion in the first quarter. Meanwhile, European sustainable funds had their first quarter of net outflows since at least 2018, with investor redemptions amounting to about $1.2 billion. Asia bled money — $900 million in investor capital — while Canada, Australia, and New Zealand attracted net new money.
ESG investors are operating in a complicated and politically charged regulatory environment. In the U.S., the anti-ESG backlash has increased since Trump returned to the White House — though investors also have been pushing back. Across the Atlantic, the EU’s pivot toward economic growth and security has diluted the clarity of its Green Deal to reduce greenhouse gas emissions. Asia in general still maintains a stable and unwavering commitment to climate action.
Hortense Bioy, head of sustainable investing research at Morningstar Sustainalytics, told Institutional Investor that “the current climate in the U.S. with the new President has intensified the ESG backlash,” prompting U.S. asset managers to rein in their efforts.
“Asset managers aren’t pushing the products as much as they used to; [they] are more cautious,” she added.
In Europe where sustainable funds have a long history, Bioy noted that “a new regulatory environment and re-shaping of the sustainable funds landscape are weighing on investor sustainability strategies.” And while these outflows from Europe “could be a shift,” she noted that it’s too early to tell if the change will be long term. “We’re only seeing the first quarter.”
There are conflicting and nuanced views of what’s happening with ESG and impact funds. Rob Brown, founder of data analytics firm Impact Evaluation Lab said the outflows can’t be seen in isolation as they are coming at a time when U.S. investors are facing political pressures to divest from sustainable funds and when markets are increasingly volatile. So, investors “are derisking broadly.”
“I wouldn’t make too much of one quarter’s worth of outflows given these long-term trends,” Brown told II. “I see this as a risk alignment rather than a statement about ESG or sustainable investing.”
Despite outflows, investor appetite for sustainable funds remains strong with global assets reaching $3.16 trillion at the end of March. A Morningstar Indexes and Sustainalytics survey of 500 institutional investors last summer found that 67 percent say ESG has grown more important over the past year, with many seeing it as a fiduciary duty. And large allocators in the U.S. — like New York City — remain committed to net zero goals.
Brown added that he believes “the longer-term commitment that the world has for more sustainable investing and in particular climate investing” will continue.
