Market comment on behalf of Mindaugas Suklevicius Founder and Fund Manager at HF Quarters

May 20, 2025: Sustainable investment funds recorded unprecedented global net outflows of approximately USD 8.6 billion in the first quarter of 2025, a sharp reversal from the USD 18.1 billion in net inflows observed in the previous quarter. In Europe, historically the largest market for ESG funds, net outflows reached approximately USD 1.2 billion, marking the first recorded quarterly outflow in the region since 2018. This shift reflects a change in sentiment, with Europe previously seen as a stronghold for ESG investments.

For European asset managers, the record outflow has intensified challenges related to allocation, performance, and regulatory compliance. A more stringent regulatory environment, coupled with growing scepticism about the profitability of ‘green’ sectors, was already weighing on performance. This was exacerbated by an unfavourable political climate, including the resurgence of anti-ESG policies in the US, which prompted a global shift in how managers market and sell sustainable products. In response, many European asset managers adjusted their strategies. In the first quarter alone, 335 sustainable funds changed their names, with 116 of them removing the term ESG, in anticipation of new EU regulations targeting greenwashing.

On the investor side, there are clear signs of declining confidence and a strategic shift. Many are seeking lower volatility and greater protection, reallocating to sustainable fixed income assets rather than ESG equities. This resource rotation suggests a temporary preference for traditional or lower-risk strategies, challenging the European ESG industry to rebuild credibility and performance.