Investment trends in ESG funds have been reported as moving upwards, rather than retreating
Global ESG Funds Rebound in Q2 2025, European Investors Lead Recovery
In a significant turnaround, global Environmental, Social, and Governance (ESG) funds experienced a rebound in the second quarter of 2025, with a net inflow of $4.9 billion, according to data from Morningstar Sustainalytics. This marks a stark contrast to the heavy outflows of $11.8 billion seen in the previous quarter.
European investors played a pivotal role in this recovery, contributing $8.6 billion in inflows to ESG funds in Q2 2025, compared to $7.3 billion in redemptions in the first quarter. Both active and passive strategies gained traction in Europe, with $4.1 billion moving into active ESG funds and $4.5 billion into passive ones.
Conversely, the United States continued to see ESG fund redemptions for the 11th consecutive quarter, with net outflows totaling $5.7 billion in Q2 2025. This trend reflects ongoing regulatory and political headwinds against ESG investing in the US.
The divergence between the US and Europe highlights a clear transatlantic divide in ESG investment trends.
In Europe, the implementation of the European Securities and Markets Authority (ESMA) guidelines on ESG fund naming led to record-high ESG-related renaming in Q2 2025. Around 600 funds adopted new names during the quarter, and over the past 18 months, some 1,346 European funds (24% of the regional fund universe, covering about $1 trillion in assets) have been renamed. The majority of these funds removed the acronym 'ESG' or related terms entirely from their names.
The United Kingdom saw 110 funds obtain official sustainability labels, managing $62 billion of assets, accounting for about 20% of UK-domiciled funds claiming sustainability characteristics.
Despite geopolitical tensions and US tariffs, ESG funds in other parts of the world continued to attract money in Q2 2025. The global ESG fund assets increased by 10% in Q2 2025, reaching $3.5 trillion, due to stock market appreciation.
Hortense Bioy, head of Sustainable Investing Research at Morningstar Sustainalytics, stated that the picture for ESG funds improved in Q2 2025. However, she noted that the impact of the guidelines on investment strategies and portfolios appears to be limited.
In summary, while US ESG fund sentiment remains subdued due to policy headwinds, European ESG investing regained momentum supported by regulatory clarity and fund adjustment activities. The global trend for ESG funds shows a shift from redemptions to investments in Q2 2025.
Businesses and investors are increasingly focusing on sustainable investing, with finance playing a vital role in this shift. In Q2 2025, European investors led the recovery of global ESG funds, demonstrating strong support for sustainable investing in their business practices.
