Financial advisors don't see ESG turnaround anytime soon

The US backlash against ESG finally appears to be going global, based on first quarter fund flows.

Meanwhile, domestic financial advisors, for their part, don’t see that money coming back into sustainable funds anytime soon.  

Global sustainable funds saw record outflows of $8.6 billion in the first quarter of 2025, reversing $18.1 billion in inflows from the previous quarter, according to a Morningstar report. It was the 10th consecutive quarter that American investors yanked money from sustainable funds, with withdrawals reaching $6.1 billion for the period.

Most notably, Europe saw its first net outflows since 2018, with $1.2 billion in outflows compared to $20.4 billion in inflows in the last three months of 2024. The European outflows stand out because the region accounts for 84 percent of the $3.2 trillion held in ESG funds globally, and it was an otherwise strong quarter of inflows for conventional funds.  

The shift against ESG was not only reflected by the flows either in the first quarter. It could also be seen in the marketing of the funds.

The Morningstar report said the first quarter of 2025 saw 335 European ESG funds rebrand, the highest activity in a quarter since the second quarter of 2022. Morningstar found that 216 funds replaced which ESG-related term they used, while 116 eliminated a term altogether. Merely three funds added an ESG term.

Tom Graff, chief investment officer at Facet, believes the problem is not all political. In his view, ESG continues to see outflows because Wall Street pushed a lot of poorly designed products during the boom period.

“Some were marketed as though ESG could contribute to better performance, which didn't pan out. Some were quickly slapped together screens overlaid on an existing strategy, and consumers eventually wised up,” Graff said.

He also thinks part of the problem is that ESG has become harder and harder to define.

“Take Tesla (Ticker: TSLA), which was an ESG darling for many years. Now most investors interested in ESG would rather not own Tesla. Stories like that have caused investors to throw in the towel on the whole concept,” Graff said.

Going forward, Graff does not expect ESG fund flows to see a major reversal anytime soon.

“I think there will always be room for transparently designed and thoughtful ESG strategies. But it just isn't a good environment for an ESG comeback just yet,” Graff said.

Elsewhere, Sean Beznicki, director of investments at VLP Financial advisors, said it is “no surprise,” given mounting political pressure and regulatory shifts aimed at dismantling ESG frameworks.

“We expect this trend to continue, with investors pulling capital from strategies that once thrived under a more supportive environment,” Beznicki said.

Matthew Liebman, CEO of Amplius Wealth, believes the political tides have shifted worldwide and, rightly or wrongly, this category of investment is often viewed through a political lens. And while predicting short-term flows is very difficult, his “best guess” is the outflows will continue in 2025.  

“Global sustainable investment firms will need to communicate a compelling investment thesis that draws investors regardless of political affiliation. Otherwise, the success of these funds in terms of asset gathering will continue to be subject to changing political tides,” Liebman said.

Finally, Jason Britton, founder of Reflection Asset Management, believes the ESG fund outflows were propelled by a combination of two events: the shifting landscape as it relates to the politics of the US, and the effect of tariffs.

“Most ESG funds are equity- and tech-heavy, and that was the sector most effected by tariffs from a performance perspective with Apple (Ticker: AAPL) and Nvidia (Ticker: NVDA) and Tesla leading the way in volatility - all three widely held in ESG funds,” Britton said.