Are the golden days of ESG behind us? Promises of perennial outperformance were likely to result in disillusionment when markets turned, and turn they did. Then, of course, there is the political backlash, exemplified but not confined to the current US administration.
Are we seeing a resulting reduction in sustainable funds? Sifting through the data, the answer (unhelpfully) is “that depends”.
Comparing sustainable assets, as per Lipper Research’s criteria, at the end of the first quarter this year with the same point last shows little change. This sustainable universe is defined as all SDR funds and SFDR Article 9 funds, plus Lipper Responsible Investment Attribute funds containing indicative sustainable keywords in the fund name. Globally, there were 36,429 share classes representing an AUM of $2.55trn in March 2024 that fitted the bill. A year later, those figures were 39,548 and $2.56trn, respectively.
Not much change there, then. But that’s a very broad view. Focusing in on regions and using differing criteria to determine the sustainable universe can change the picture.
Continental considerations
In Europe, the number of funds removing ESG-related terms increased significantly over the first four months of 2025, with the approach of the European Securities and Markets Authority’s 21 May deadline for existing funds. The guidelines, published in May 2024, aim to ensure fund names accurately reflect their sustainable objectives and so prevent greenwashing.
From 2024 to the end of April 2025, LSEG Lipper records 388 funds adding ESG-related terms, representing an AUM of €90.42bn. However, 757 funds dropped ESG-related terms, representing an AUM of €399.81bn. So more than €300bn has fallen out of the universe of funds using ESG related terms, as outlined by ESMA. What’s interesting—though this may just be a statistical artifact—is that the inflows from the former group virtually mirror the outflows from the latter over the first four months of 2025 (€2.87bn versus -€2.93bn). Regulation has therefore been a significant driver of sustainability-defined fund assets in Europe.
Article 8 funds are still gathering net assets. Total article 8 flows for Q1 2025 were €80.44bn, albeit down from €107.17bn the previous quarter. Despite this, the same period saw Article 9 outflows of €7.68bn, or 2.2% of their Q4 2024 AUM. Article 9 fund flows haven’t had a positive quarter since Q3 2023.
UK trends
The UK market, where the FCA had already tightened the screws on naming conventions, is seeing significant allocation shifts when compared to last year, as reviewed in PA Future in February. For example, then the best-selling sustainable classification was Equity US, accounting for most of the inflows to this classification. In Q1 2025, while still in positive territory, sustainable money made up just 9.2% of the flows to the classification overall.
This is a dramatic shift, as sustainable Equity US exceeded the entire annual take for sustainable equity funds overall by almost £500m in 2024. Sustainable Equity US flows for 2023 were £3.9bn, and conventional flows were negative £4.33bn. Appetite for US large caps marched in lockstep with sustainable flows until Q3 2024, when sustainable flows were flat despite continuing strong demand for US equities, and Q1 2025 has seen sustainable asset gathering slip further. That’s still more positive than the situation across the Channel, where Equity US article 8 and 9 funds suffered the largest outflows of the quarter (-€4.02bn) despite Equity US being the second best-selling classification overall.
Is this rotation reflected in a pull-back of sustainable fund offerings? Hardly: in March 2024, 3,431 UK share classes were defined by Lipper Research as sustainable; as of March 2025, that number was 3,407.
But the advent of SDR has not proven to be the catalyst for which the industry had hoped. LSEG Lipper records £27.33bn of assets held in these funds, as of March 2025: Sustainability Focus, £22.33bn (82.3%); Sustainability Impact, £2.94bn (10.9%); Sustainability Improvers, £1.04bn (3.8%); and Sustainability Mixed Goals, £0.81bn (3%).
Net aggregate redemptions to SDR funds over the quarter were £783m—considerably larger than for Lipper Research’s sustainable universe for the UK, despite the SDR fund set being much smaller. Sustainability Focus funds suffered worst, shedding £597m (equity, -£445m; mixed assets, -£128m; bonds, -£24m).
In summary: there have been performance headwinds for many sustainable funds, which impact asset gathering. In addition, regulators are restricting the terms that can be used in fund names and descriptions to combat greenwashing. That has brought about many rebrandings—though not, to any substantial degree, a change in how the funds themselves are managed. If Kermitted Sustainable Dark Green ESG Global Equity had a policy of tobacco exclusion before it was rebranded Kermitted Global Equity, it likely still does.
Lastly, the normal T&Cs: while we’re not seeing the figures to back up any significant industry pullback from ESG in terms of product offerings, that doesn’t mean it won’t happen, but that, so far, the furore doesn’t seem to be backed up by the data.
Additional research by LSEG Lipper’s Kacper Kruk and Christoph Karg
This article first appeared in PA future.
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The views expressed are the views of the author and not necessarily those of LSEG Lipper. This material is provided as market commentary and for educational purposes only and does not constitute investment research or advice. LSEG Lipper cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.
