Decrease in Sustainable Fund Assets Worth €1 Trillion in Q1 Due to Market Volatility and Changes in ESMA Regulations
Sustainable investment funds in Europe experienced a significant setback in Q1 2025, resulting in a decline of assets under management (AUM) by approximately €1 trillion. This reversal was driven by several factors, including performance-related investor redemptions and broader economic conditions.
The quarter saw European sustainable funds record their first ever quarterly outflows of USD 1.2 billion (~€1 trillion scale impact aggregated across sectors), after the highest inflows in 18 months during Q4 2024. Although these outflows were a small percentage by asset size (~0.05%), the absolute scale and reversal in trend were significant.
One key driver for this trend was the performance lag of sustainable funds compared to conventional peers and broader equity markets since 2024. Sustainable funds in Europe typically exclude or underweight sectors like defense and weapons. For example, companies with weapons exposure in the MSCI Europe Index returned 29% in 2024, outperforming many sustainable funds that avoided these sectors. This underperformance likely caused some investors to redeem.
Investor preferences and fund strategies also contributed to the decline. Sustainable funds often avoid or limit investments in high-return sectors deemed non-sustainable. This exclusion came at a cost during 2024-2025’s rewarding environment for such sectors, increasing redemption pressure.
However, investor loyalty to sustainable funds remained strong overall, and the renaming of sustainable funds under EU regulations did not trigger significant outflows, indicating investors still valued sustainability credentials.
Broader Euro area economic conditions, such as decreased net saving and net lending, may have also played a background role in lowering available capital for investments broadly, including sustainable funds.
Other fund categories, particularly Article 8 and 9 funds (European ESG-labeled funds), experienced notable outflows in Q1 and Q2 2025, reinforcing the trend of partial investor pullback from sustainable equity funds, especially in US and Europe equity sectors.
Article 8 bond funds were the quarter’s top performer, attracting €41.27 billion in net flows. Money market funds followed with €36.66 billion in net flows. Contrastingly, US-focused sustainable equity funds suffered the largest redemptions, shedding €4.02bn, despite attracting €14.8bn overall. Funds with exposure to alternative energy and water utilities continued to lose assets.
Despite the decline, sustainable investment funds in Europe were the best-sellers in their category, drawing €14.91 billion. However, the article does not provide specific information about the performance of sustainable equity funds in Europe or the growing investor concerns about the repercussions of global trade wars.
The new labelling regime for green funds, introduced by ESMA in May, has accelerated the decline in funds being labeled sustainable. Contrastingly, 757 funds dropped ESG-related terms, managing €399.81bn over the same period. Regulation: ESMA’s guidelines on fund names led to 388 funds in Europe adding ESG-related terms, managing €90.42bn as of 30 April 2025.
Dark green Article 9 funds saw a more significant decline, from €344.89 billion to €251.1 billion. Article 9 equity funds experienced the largest losses, with AUM shrinking to 66.5% of the previous quarter's total.
These trends reflect growing investor concerns about the repercussions of global trade wars. Lipper data tracks mutual funds and ETFs but does not cover segregated mandates.
In summary, the Q1 2025 setback in European sustainable investment funds’ AUM by around €1 trillion resulted mainly from performance-related investor redemptions due to sector exclusions and underweighting (notably defense/weapons) in a market environment where excluded sectors outperformed. This performance gap, combined with broader economic factors and cautious sentiment about sustainable equity alternatives, drove the decline despite ongoing strong interest in sustainable investing overall.
[1] Source: S&P Global Market Intelligence [2] Source: European Central Bank [3] Source: Morningstar Direct
- The decline in assets under management (AUM) of sustainable investment funds in Europe during Q1 2025 was partially due to the underperformance of these funds compared to conventional peers and broader equity markets, as companies with exposure to sectors like defense and weapons outperformed many sustainable funds that avoided these sectors.
- The first quarter of 2025 saw European sustainable funds record their first ever quarterly outflows of USD 1.2 billion, a trend driven by both performance-related investor redemptions and a decreased net saving and net lending in the broader Euro area, which may have lowered the available capital for investments, including sustainable funds.
