NZ and Australia have bucked the global trend that saw record high net outflows from sustainable-label funds in the March quarter including a first backward step for the sector in Europe.
Data from the Morningstar-owned Sustainalytics confirms a strong global shift away from environmental, social and governance (ESG) styled products amid a US political crackdown and more stringent European regulations.
“Global sustainable funds registered record-high redemptions of USD 8.6 billion in the first quarter of 2025, driven by the United States and, to a lesser extent, Europe. These redemptions follow restated inflows of USD 18.1 billion in the fourth quarter of 2024,” the Morningstar report says.
“Notably, Europe suffered its first quarter of net outflows since we started tracking this universe in 2018. Withdrawals amounted to USD 1.2 billion, contrasting with the restated inflows of USD 20.4 billion in the last quarter of 2024.”
US investors yanked a net US$6.1 billion from sustainable investment products in the March quarter.
Hortense Bioy, Sustainalytics head of sustainable investing research, told media: “The ESG backlash coming out of the US is affecting managers and making them more cautious globally,” she said. “It’s influencing the way they are talking about products and selling them outside of the US.”
However, investors in Australia and NZ tipped in a collective net US$300 million to ESG funds during the first three months of 2025 while the Canadian sector recorded similar positive flows.
Overall, Australasian managed funds and ETFs pulled in about US$6 billion of net new money in the March quarter with passive funds picking up the bulk (US$4.7 billion).
The latest result marks the 10th successive negative flow quarter for the US sustainable fund sector but the European statistic is perhaps more significant. Europe represents about 84 per cent of the entire global ESG-type funds under management compared to just 10 per cent for the US.
“Up to last quarter, European sustainable funds had consistently attracted positive quarterly flows, including in the fourth quarter of 2023, when conventional funds experienced redemptions,” Morningstar says.
Net flows into traditional managed funds (including ETFs) in the Morningstar universe hit US$530 billion in the March quarter, albeit down from the almost US$850 billion during the final three months of 2024.
Globally, BlackRock “dominates the sustainable investing space with about USD 403 billion of assets in ESG-focused and sustainable open-end funds and ETFs”, the report says.
“UBS is in a distant second with a total AUM of USD 179 billion, closely followed by Amundi’s USD 178 billion.”
The Deutsche Bank-owned (and underlying global asset manager for Simplicity) DWS suffered the highest ESG fund net quarterly outflows, losing more than US$4.6 billion for the period,
BlackRock ranks fourth by size in the Australasian sustainable fund market led by Dimensional Fund Advisors (17.1 per cent), Betashares (12.1 per cent) and Vanguard (8.7 per cent), according to Morningstar.
Despite the quarterly outflows, global sustainable fund assets dropped marginally to just over US$3.1 trillion as at March 31 but down from a peak of almost US$3.4 trillion at the end of September last year.
The Morningstar report notes that ESG-like fund launches continue to slow while product closures accelerate.
Regulatory changes in Europe, particularly, explain some of the sustainable fund universe shrinkage where about 335 products in the Morningstar category rebranded – 216 swapping one ESG-related term for another and 116 ditching the label altogether.
“In total, we estimate that more than 640 European funds with ESG-related terms in their names (or 14%) have rebranded in the past 15 months, including more than 590 (12%) that have dropped or changed ESG terms,” the report says.
Meanwhile, managers have scoured the thesaurus for regulatory-compliant language to sprinkle over funds with words including “select, committed, advanced, optimized, leaders, tilt, thoughtful, and enhanced” trending now.