Decrease in sustainable fund assets valued at €1 trillion in Q1, attributable to market distress and alterations in ESMA regulations
Sustainable investment funds in Europe experienced a significant setback in the first quarter of 2025, particularly in Article 9 funds, mainly due to modest but notable redemptions concentrated in Europe. This quarter marked the first time since at least 2018 that European sustainable funds saw net outflows, while conventional funds continued to attract strong inflows.
The new labelling regime for green funds, such as the EU’s Sustainable Finance Disclosure Regulation (SFDR) which includes Article 8 and Article 9 categories, has intensified scrutiny on green and sustainable funds. Article 9 funds, which must have a clear sustainable investment objective, have generated challenges for fund managers and investors alike. The updated labelling regime demands more transparency and stricter sustainability criteria, and this has led to some temporary investor caution and withdrawals as funds adjust to these standards. This cautious behavior partly explains the outflows in Article 9 sustainable funds during the period.
Despite these short-term setbacks, sustainable funds continue to outperform traditional funds over the long term, demonstrating solid investment performance and attracting ongoing interest. The outflows were minimal in relative terms (e.g., 0.3% of assets globally) and reflect broader market volatility rather than fundamental flaws in ESG investing.
Globally, sustainable investing remains robust, with strong fund flows and issuance in regions such as Asia, hinting at the resilience and appeal of sustainable assets in the medium to long term.
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. Sustainable equity funds in Europe were the best-sellers in their category, drawing €14.91 billion. Article 8 and 9 funds saw combined net flows of €72.76bn in Q1, with bond strategies performing best.
However, funds with exposure to alternative energy and water utilities continued to lose assets. The decline was primarily driven by falling asset prices and major outflows from Article 9 funds. Redemptions from Article 9 equity funds and a cooling in investor appetite for thematic strategies contributed to the worst quarter on record for sustainable fund assets.
In conclusion, the Q1 2025 setback in European sustainable funds, especially Article 9, was mainly driven by redemptions amid increased regulatory scrutiny from the new labelling regime and market volatility. However, this appears to be a short-term correction rather than a reversal of durable growth trends in European sustainable investing.
- The ongoing scrutiny of the new labelling regime, such as the EU's Sustainable Finance Disclosure Regulation (SFDR), has led to some temporary investor caution and withdrawals from Article 9 funds, particularly in environmental-science and climate-change sectors, as fund managers work to meet the strict sustainability criteria and higher transparency demands.
- In spite of the temporary outflows from Article 9 funds in Q1 2025, sustainable funds continue to exhibit solid long-term investment performance, with the sector demonstrating ongoing interest and outperforming traditional funds in areas like business and finance, as evidenced by strong fund flows and issuance in regions like Asia.
