European Sustainable-Fund Flows: Investors Stick, Not Twist

European sustainable funds attracted over USD 20 billion in Q4 2024 — the highest inflows in 18 months — before recording their first ever quarterly outflows of USD 1.2 billion in Q1 2025.¹ While this represented less than 0.05% of total assets within European sustainable funds (USD 2.7 trillion as of March 31, 2025), it was a notable reversal in trend.² In this blog post, we explore what drove these flows, including performance and fund-rebranding activity, and what it means for sustainable investing in Europe.  

Between 2018 and 2023, sustainable global-equity funds delivered higher investment returns than both their conventional peers and the MSCI ACWI Index on an annualized basis. Since then, things have been more challenging, with the average sustainable global-equity fund lagging conventional peers and the broader equity market in 2024. This is likely to have been partially driven by a need to align with perceived investor preferences. For example, sustainable funds in the EU have typically either excluded or been underweight companies with weapons exposure. Companies in the MSCI Europe Index with weapons exposure averaged annual returns of 29% in 2024, and by May 31, 2025, made up over 10% of this index. 

Data as of May 31, 2025. Includes European-domiciled mutual funds and ETFs with a global-equity large-cap focus and accompanying asset-flow data (878 sustainable funds and 522 conventional funds). Sustainable funds are categorized based on prospectus disclosures. Source: MSCI ESG Research

Several European asset managers have revisited their weapons-exclusion policies recently, with increased recognition that it may be possible to align with investor values on ethics and human rights without the need for a blanket exclusion.³

Sustainable-fund investors ‘stickier’ than conventional peers 

The ability of sustainable funds to align with investors’ values appears to foster greater “customer loyalty,” with investors more willing to look past variations in performance. While outflows typically follow underperformance, this relationship was clearer in conventional funds than their sustainable-fund peers. Our analysis shows a lower correlation between Q1 2025’s fund flows and three-year performance for sustainable equity and fixed-income funds than conventional equivalents. This suggests sustainable investors may be guided by additional considerations — such as sustainability characteristics, impact goals or regulatory alignment. 

Data as of May 20, 2025. Includes European-domiciled mutual funds and ETFs with available data for historic fund flows, assets under management (AUM) and fund performance. Normalized fund flows for Q1 2025, expressed as a percentage of fund AUM, and three-year, annualized, historic returns for the period 2022-2024. Equity funds are shown individually, as they are the largest product category. Source: MSCI ESG Research

Fund renaming did not drive outflows 

Within the sustainable-fund landscape, Article 8 funds promote environmental or social characteristics, while Article 9 funds go further with sustainable investments as their objective. Investors have shown a propensity to stick with these funds through a renaming. Over 800 Article 8 and 9 funds have rebranded in response to the European Securities and Markets Authority’s fund-naming guidelines, as of June 30, 2025. In the three months following rebranding, renamed funds were no more likely to see outflows than peers with no name change.⁴ In Q1 2025, six European sustainability funds were in the top-20 fund-outflows list, but only one renamed during the analysis period, indicating performance or other external factors, such as geopolitical developments, likely played a part.  

Data as of June 30, 2025. This chart shows the percentage change in the number of Article 8 and 9 funds using relevant keywords between May 2024 (when the European Securities and Markets Authority announced its fund-naming guidelines) and June 2025. Fund category is based on relevant terminology in the fund name. ESG is a subset of the environmental category. Source: MSCI ESG Research

Investors look beyond fund names

Investors may have had good reason to remain supportive of funds after a renaming. Analysis of disclosures in fund prospectuses shows that nearly 90% of funds renamed during our review period remained sustainability products, regardless of the product name.⁵ This indicates that fund providers remain committed to sustainable investing, beyond using the fund name to signal marketing intent. It also hints that investors in such funds may be looking deeper at the underlying portfolio characteristics. In some cases, these rebranded funds may also be achieving broader appeal, attracting investors looking for more diversified strategies that are not subject to portfolio constraints, such as Paris-aligned benchmark exclusions.⁶

Fund houses remain committed to sustainability

Asset managers also remain committed to integrating financially material sustainability factors into their investment processes, and not just for sustainable funds. Of the top 25 fund houses by AUM, all but one integrates sustainability-related considerations when running their conventional funds.⁷ Together these firms represent over 50% of retail funds under management in Europe, with total net assets around EUR 6.3 trillion. The only firm not to consider financially material sustainability risks in conventional funds is Vanguard, due to its focus on index trackers.

Managers have good reason to continue incorporating sustainability information into their investment processes. Past evidence shows that good governance, human-capital management, data security and carbon emissions were all among factors shown to be associated with lower risk and higher returns over the long term.

Looking ahead: ESG in transition

Outflows from European sustainable funds in Q1 2025 were an unwelcome shift for a segment more accustomed to steady inflows. Yet this change may signal a healthy evolution. Investors clearly continue to value the alignment of products with their sustainability preferences, but they also care about performance. Recent shifts in attitudes toward defense-company exclusions reflect a growing sophistication in how both investors and fund providers interpret those preferences. At the same time, the resilience of sustainable investors — less reactive to underperformance or renaming — suggests loyalty is grounded in more than labels.

Fund managers, for their part, continue to integrate financially material sustainability risks across both sustainable and conventional offerings.⁸ The outflows we’ve seen in Q1 may not be a retreat from sustainable investing, but a recalibration: one that recognizes the importance of performance, investor intent and long-term value creation.