Most Recent Inflows in ESG Funds Reported, No Outflows Mentioned
European ESG Funds See Strong Recovery in Q2 2025
In a notable turn of events, European ESG funds experienced a significant rebound in Q2 2025, marking a recovery from the record $11.8 billion in net redemptions in Q1. This recovery was largely driven by European investors who reversed their prior quarter's redemptions of $7.3 billion by contributing $8.6 billion of net new money into ESG funds in Q2.
According to data from Morningstar, at least 1,346 funds, or 24% of Morningstar's European fund universe, representing about $1 trillion in assets, have been renamed over the past 18 months. Many of these funds removed 'ESG' or related terms entirely from their names, but many opted to replace them with alternative terms that still signal differentiation and continued consideration of ESG factors.
The United States, however, continued to see net redemptions, amounting to $5.7 billion in Q2, marking the 11th consecutive quarter of such activity. This highlights a notable transatlantic divergence in ESG investing sentiment.
European sustainable strategies kept pace with broader equity and bond markets during Q2. The Morningstar Global Markets Sustainability Index rose by 12.6%, slightly outperforming the broader Global Markets Index at 11.5%. Similarly, the Morningstar Global Corporate Bond Sustainability Index gained 4.5%, compared to 4.3% for the broader bond index. This indicates competitive performance for ESG funds in Europe despite geopolitical and economic uncertainties.
The impact of the EU European Securities and Markets Authority (ESMA) fund naming guidelines was also notable. Uncertainty among European investors about potential regulatory changes and anti-greenwashing measures began to ease in Q2 as the ESMA fund naming guidelines approached implementation. This regulatory clarity likely contributed to the renewed investor confidence and inflows into ESG funds within Europe.
Regulators outside the US are maintaining their course regarding ESG funds. In the UK, 110 funds have adopted an official sustainability label, representing $62 billion of assets, accounting for about 20% of UK-domiciled funds claiming sustainability characteristics. Volatility was sparked by geopolitical tensions and US tariffs in Q2, but the impact of these factors seems to have lessened in Q2.
In summary:
| Aspect | Details | |------------------------------|--------------------------------------------------------| | Global ESG Net Flows Q2 2025 | +$4.9 billion (rebound from -$11.8 billion in Q1) | | European Investors' Net Flows | +$8.6 billion (reversal from -$7.3 billion in Q1) | | US Investors' Net Flows | -$5.7 billion (11th consecutive quarter of outflows) | | European Investors' Returns | ~12.6% equities (vs 11.5% broader index), 4.5% bonds (vs 4.3%) | | Impact of ESMA Guidelines | Reduced uncertainty, easing investor concerns about greenwashing regulation |
Hortense Bioy, head of Sustainable Investing Research at Morningstar Sustainalytics, stated that the picture for ESG funds improved last quarter. This improvement was evident in the 72 new ESG funds launched globally in Q2, with a significant boost from the new incentive scheme in Thailand. Despite geopolitical challenges and an ESG backlash, European ESG funds saw a strong recovery in Q2 2025, supported by regulatory clarity from ESMA and competitive fund performance.
Sustainable investing gained traction among European business in Q2 2025, as evidenced by the net inflow of $8.6 billion into ESG funds, a significant reversal from the prior quarter's redemptions. This indicates a growing interest in finance that takes into account environmental, social, and governance (ESG) factors. Furthermore, the competitive performance of European ESG strategies in comparison to broader equity and bond markets adds credibility to sustainable investing as a viable business strategy.
