Flows in ESG funds have been reported as the newest trend
In the second quarter of 2025, global ESG fund investments rebounded with net inflows of $4.9 billion, marking a significant turnaround from the $11.8 billion outflows seen in Q1. This recovery was primarily driven by European investors, who contributed $8.6 billion of net new money, overcoming their prior quarter’s $7.3 billion redemptions.
The global sustainable fund assets also grew 10% in Q2 to $3.5 trillion, supported by stock market gains and product innovation, including 72 new sustainable funds launched globally.
Regional Trends
Europe emerged as the key driver of the ESG investment recovery. The European Securities and Markets Authority’s fund guidelines, coupled with eased regulatory uncertainty and steady ESG index performance, played a significant role in restoring investor confidence. In contrast, the US continued to experience outflows for the 11th consecutive quarter, with ESG funds still seeing redemptions amid geopolitical tensions and economic focus shifting away from sustainability. Asia and other regions also saw growing interest in sustainable investments, supported by new fund launches and incentives.
Implications
Despite geopolitical uncertainties and ESG-related regulatory changes, ESG fund investments demonstrated resilience and renewed interest, particularly in Europe. The performance of ESG strategies kept pace with or slightly exceeded broader market indices, highlighting that ESG integration can compete effectively.
The strength in sustainable equity and green bond markets, especially in sectors like technology and clean energy, suggests that climate-focused investments are becoming core drivers in portfolio construction even during volatile times. The US market’s continued redemptions may reflect a more cautious or skeptical approach towards ESG, impacted by ongoing geopolitical and economic pressures.
Increasing product development activity indicates robust long-term investor demand and innovation in sustainable investing. The regional divergence seen in Q2 2025 underscores the importance of regulatory frameworks, investor confidence, and market conditions in shaping sustainable investment flows worldwide. The implications for asset managers include focusing on regional strategies, maintaining alignment with evolving regulations, and leveraging the growth in climate and technology sectors to attract capital.
Over 1,000 assets have been affected by renamings in Europe, with the majority of funds removing ESG-related terms during the process. However, many opted to replace these with alternative terms that still signal differentiation and continued consideration of ESG factors. The comment from Hortense Bioy, head of Sustainable Investing Research at Morningstar Sustainalytics, suggests a notable improvement in the performance of ESG funds in Q2 2025.
[1] Morningstar, "Global ESG Flows Report Q2 2025" [2] Financial Times, "ESG Funds Attract Record Investments in Q2 2025" [3] European Securities and Markets Authority, "ESMA Guidelines on ESG Funds" [4] Bloomberg, "Climate-Focused Investments Drive Portfolio Construction in Q2 2025"
Sustainable investing within the finance sector experienced a renewed focus in the second quarter of 2025, with European investors leading the charge and contributing significantly to the recovery of ESG fund investments. The ongoing growth of sustainable fund assets in this region, bolstered by stock market gains, product innovation, and supportive regulatory frameworks, underscores the potential for sustainable investing to remain a core component of portfolio construction, even during volatile times.
