Decline in Sustainable Fund Assets by One Trillion Euros in Q1 due to Market Instability and ESMA Regulatory Adjustments
In Q1 2025, sustainable investment funds in Europe witnessed a significant decline in assets under management (AUM), amounting to approximately €1 trillion, according to LSEG Lipper's "Everything Green Flows" report. This decline was primarily caused by net outflows from equity sustainable funds, particularly those focused on the US market.
The trends suggest a shift in investor preferences within sustainable funds, with a reduced interest in equity and thematic strategies. This is evident in the net redemptions from Article 9 equity funds and a cooling in investor appetite for thematic strategies, resulting in the worst quarter on record for sustainable fund assets.
US-focused sustainable equity funds suffered the largest redemptions, shedding €4.02bn. Article 9 equity funds, which have stricter sustainable criteria, suffered the largest losses, with AUM shrinking to 66.5% of the previous quarter's total. The decline was primarily driven by falling asset prices and major outflows from Article 9 funds.
Despite this, sustainable equity funds in Europe were the best-sellers in their category, drawing €14.91 billion. However, the overall trend points towards a growing investor caution, reflecting concerns about the repercussions of global trade wars.
The trends are also accelerated by the European Securities and Markets Authority's (ESMA) new labelling regime for green funds, which entered into force in May. This new regime imposes more stringent criteria on the type of assets that can be included in funds labeled ESG or Sustainable.
Interestingly, Article 8 bond funds were the quarter's top performers, attracting €41.27 billion in net flows. This performance highlights the resilience of certain sustainable investment sectors, such as bonds. Total AUM in Article 8 funds decreased from €8.03 trillion to €7.07 trillion.
Regulation continues to influence sustainability-related fund assets in Europe, as evidenced by the response to ESMA's guidelines on fund names. Lipper data tracks collective investment vehicles such as mutual funds and ETFs but does not cover segregated mandates.
From 2024 to the end of April 2025, 388 funds added ESG-related terms, managing €90.42bn. However, over the same period, 757 funds dropped ESG-related terms, representing an AUM of €399.81bn. This suggests a dynamic and evolving landscape in the sustainable investment sector.
Despite the Q1 2025 decline, it is important to note that the sustainable investment sector continues to grow, with a focus on resilient sectors such as bonds. The trends indicate a need for continued regulatory support and investor education to navigate the challenges and capitalise on the opportunities in this sector.
[1] Lipper, "Everything Green Flows" report, Q1 2025 [2] Market volatility and concerns around global trade policies and US tariffs [3] Rebound seen in Q2 2025 sustainable equity markets
- The decline in sustainable investment funds in Europe, as observed in Q1 2025, is not a comprehensive reflection of the sector's health, with a shift in investor preferences favouring resilient sectors such as bonds.
- The European Securities and Markets Authority's (ESMA) new labelling regime for green funds, which entered into force in May 2025, has instigated a dynamic and evolving landscape within the sustainable investment sector, with some funds adding ESG-related terms while others are dropping them.
- Regulation and investor education will continue to play crucial roles in navigating the challenges and capitalizing on opportunities in the sustainable investment sector, ensuring its growth and resilience in the face of global trade wars and market volatility. (For example, technology could be integrated into data-and-cloud-computing systems to enhance regulatory compliance and investor education, thus fostering sustainable investment.)
