Sustainable funds recorded their first full year of net outflows in 2025, after investors withdrew 84 billion dollars from ESG strategies worldwide, according to Morningstar data. While the headline figure suggests a sharp break with previous years, Morningstar said it overstates the extent to which investors are abandoning sustainable investing.
A substantial share of the outflows in the second half of the year was driven by technical reallocations by large UK institutional investors. Firms including Blackrock, Scottish Widows and Northern Trust shifted assets from pooled ESG funds into bespoke ESG mandates, which are not captured in Morningstar’s fund-flow data and therefore show up as redemptions.
“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,” said Hortense Bioy, head of sustainable investing research at Morningstar Sustainalytics. “Nonetheless, the wider environment remains challenging, as persistent headwinds, including geopolitical tensions, the ESG backlash, regulatory backpedaling, and mixed performance, continue to weigh on investor appetite.”
Pension decisions shape data
According to Morningstar, the European outflow figures for the third and fourth quarters were largely shaped by a small number of UK pension decisions. In the third quarter, a pension fund redeemed assets from four UK-domiciled ESG funds managed by BlackRock and transferred them into specially designed ESG mandates. A similar move followed in the fourth quarter, when Scottish Widows shifted assets. Taken together, these decisions accounted for the majority of European ESG outflows in both quarters.
Europe, which represents about 86 percent of global ESG fund assets, ended 2025 with net outflows of 62 billion dollars, reversing inflows of 54 billion dollars a year earlier. It marked the first annual net outflow since Morningstar began tracking sustainable funds in 2018. Even after adjusting for the UK reallocations, pressure remained: excluding these transactions, European sustainable funds still recorded net outflows of about 3.1 billion dollars in the third quarter.
LSEG Lipper data adds further nuance to the picture, suggesting that ESG fund flows in Europe are fragmenting rather than collapsing. Lipper’s figures show that redemptions in 2025 were concentrated in equity-heavy sustainable strategies, while sustainable bond and mixed-asset funds continued to attract inflows, particularly toward the end of the year.
The data also pointed to a widening split within the SFDR framework, with Article 8 funds proving more resilient than Article 9 equity funds. LSEG Lipper said this indicates that investors are increasingly favoring sustainability as a portfolio overlay rather than as a narrowly defined thematic exposure.
Pressure visible in biodiversity funds
Strains in the ESG market are most visible among smaller thematic strategies. Morningstar identifies 33 biodiversity-themed funds globally, of which six have already closed. Only six funds manage more than 100 million euros, a commonly used threshold for commercial viability.
Against that backdrop, AXA Investment Managers decided in January 2026 to close its biodiversity-focused equity fund after less than four years. The fund managed less than 50 million euros and recorded a return of -23 percent since launch. According to Morningstar analyst Ronald van Genderen, the case is representative. “The funds have, without exception, proved largely unsuccessful in attracting investor capital,” he said to Investment Officer.
US follows a different pattern
In the United States, similar mandate reallocations played little role. Sustainable funds there recorded net outflows for the 13th consecutive quarter in 2025, with investors withdrawing 21 billion dollars over the year, mainly from actively managed strategies.
Globally, sustainable funds saw outflows of 27.2 billion dollars in the fourth quarter, following restated outflows of 54.9 billion dollars in the third quarter. At the same time, nearly 1.7 trillion dollars flowed into the broader fund market.
Despite the redemptions, total assets in sustainable funds rose to about 3,900 billion dollars by the end of 2025, supported by market gains.