The backlash against sustainable investing in the United States has now spread across the globe, as funds focused on environmental, social and governance (ESG) factors saw record-high outflow worldwide in the first quarter of 2025.
Only two regions – Canada and Australasia (Australia and New Zealand) – continued to raise new money for sustainable funds in the first three months of the year.
With Donald Trump’s anti-ESG policies looming over U.S. and global markets, investors pulled US$8.6 billion from sustainable mutual funds and exchange-traded funds (ETFs) in the first quarter, according to a report from Morningstar Sustainalytics. By contrast, the previous quarter saw inflow of US$18.1 billion. Investors in the United States led the charge, withdrawing more than US$6 billion in the first three months of 2025, the 10th consecutive quarter of outflow.
European investors, too, joined the general retreat. Redemptions – when investments are returned to the investor, usually as cash – in Europe were US$1.2 billion in the quarter, the first period of outflow since 2018. Asian sustainable funds also amassed net withdrawals in the same period.
Yet, Canada and Australasia had positive inflow of about US$300 million each. It’s too early to say whether this is a long-term trend, but both regions seem to be coming back from periods of significant withdrawal: CAD$2.5 billion for Canada last year and US$740 million for Australasia in 2023.
The divergent trend lines suggest that both regions are recovering from fallback by so-called ESG tourists, or fund companies with only a passing commitment to sustainable investment but who entered the category two or three years ago to test the market. What’s left is a thinning core of funds committed to long-term responsible investing.
Sucheta Rajagopal, a veteran responsible-investment adviser based in Toronto, says a number of mainstream fund companies and asset managers set up new sustainable funds in 2022, hoping to cash in on a global ESG boom triggered by the substantial support for renewable energy and cleantech under the Biden administration and in the European Union. “There was a lot of bandwagon-jumping,” she says. “There were a lot of firms and fund managers that didn’t really believe in [sustainable investing], but because it was the flavour of the moment, they launched these products . . . They were just grabbing onto it.”
Now, many of these funds are closing or rebranding. Creation of new funds has slowed dramatically since the heyday three years ago.
Surviving funds believe in ESG
The surviving funds are led by managers who “genuinely believe in ESG as a risk-management tool and in sustainability and climate change and that companies paying attention to those things are going to end up doing better,” Rajagopal says.
The Morningstar data “underscores the strength of Canada’s financial ecosystem, where non-bank fund companies like NEI, alongside independent and credit union advisers, create a more genuinely sustainability-focused environment,” John Bai, chief investment officer for NEI Investments, said in an email.
The Canadian sustainable funds industry is dominated by three major players: NEI Investments, Desjardins and National Bank. Collectively, they accounted for 58% of sustainable fund assets in Canada in 2024. NEI and Desjardins are financial cooperatives; National Bank, based in Montreal, is the smallest of the big chartered banks.
Advisers recommending funds from these companies have more leeway to provide a strong case for sustainability than their peers at the large Bay Street banks and Wall Street ETF companies. They can talk their clients through the ups and downs of sustainable investing while supporting their clients’ choice to invest in a socially and environmentally minded way. Most credit unions and caisse populaires widely market their sustainable fund offerings, and advisers receive better training on ESG options than advisers at banks.
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Hortense Bioy, head of sustainable investment research for Morningstar Sustainalytics, agrees that this is a strong factor driving the Canadian inflow data. In some jurisdictions, she says, this is achieved through the hard path of regulation rather than the soft path of adviser guidance. “We’re seeing the same trend in France, where investors are required by law to hold at least one ESG fund in their savings account,” she said in an email.
But Paul Calluzzo, professor of finance at Queen’s University in Kingston and a member of the university’s Institute for Sustainable Finance, says preferences on issues like ESG still play only a part in how investors choose funds, even for those who are more sustainability-minded. Financial performance based on risk and return plays a major role. “The number one factor that we look at in fund flows is performance,” he says.
Underperformance has contributed to the outflows in sustainability funds, especially those investing in renewable energy or cleantech. Many of these funds have underperformed their conventional peers since 2022, when interest rates caused shares in these sectors to plummet.
Investors shift to bond funds
In Canada, fixed-income funds attracted 87% of the Canadian inflow in the first quarter. Equity and other funds attracted the rest. It appears that the risks posed by a second Trump presidency have driven many sustainability-focused investors to lower-risk bond funds.
But Rajagopal says that sustainable investors have a strong preference for ESG bond funds that include green and impact bonds, especially those with a climate theme. “People are saying we want to finance these sorts of things that are more positive than equity investments, where a lot of publicly traded companies have limits on what they can really do about climate.”
The retreat in sustainable investing in the United States looks like it’s going to get worse before it gets better. In Europe, it may only just be starting. But for Canada, Australia and New Zealand, there are encouraging signs that the ESG sightseers are hitting the exits, leaving the sustainability locals to carry on.
Eugene Ellmen writes on sustainable business and finance. He is a former executive director of the Canadian Social Investment Organization (now the Responsible Investment Association).
