The moment of truth is approaching for investment funds that present themselves as “sustainable” in Europe. Under increasing regulatory pressure and in the face of changing market sentiment, hundreds of these funds have already decided to remove any “green” references from their names.
According to data from research firm Morningstar, more than 640 European funds have already changed their names in 2024 and the first quarter of 2025. Of these, more than 590 funds have eliminated all references to sustainability. This “rebranding” movement has involved around 14% of the European sustainable fund universe over the past 15 months, with 12% having changed or removed ESG-related language.
These are not mere cosmetic adjustments. European regulators, led by Esma, are stepping up their fight against greenwashing. New rules, which came into force for new funds at the end of 2024 and will apply to all funds from 21 May, require tangible proof of sustainability. Funds using ESG terms (environment, social, governance) must prove that at least 80% of their investments correspond to the claimed sustainability characteristics or objectives. Those mentioning “social/societal,” “governance” or “environment” in their name must also apply exclusion criteria (on arms or tobacco, for example).
In an analysis published on 10 April, Esma estimated that the “E” in ESG directly led to a 2.2% increase in assets under management in the first quarter of the following year and an 8.9% increase over one year, mainly driven by the “E” (+16%).
Faced with these stringent requirements, managers have been sifting through their offerings. Non-compliant funds have two options: change their name or revise the composition of their portfolio. Morningstar anticipates a significant increase in name changes in April and May 2025. In the first quarter of 2025, the number of name changes has already doubled compared to the previous quarter. The adjustments mainly concerned passive index funds. In Q1 2025 alone, more than 180 funds removed terms such as “ESG,” “sustainable” or “sustainability” from their names. “ESG” was the term most abandoned, notably by passive strategies managing $94bn in assets. To replace these politicised terms, words such as “screened,” “transition,” “climate” and “committed” are gaining popularity, signalling a different strategic focus while seeking to retain ESG-sensitive investors.
This withdrawal of sustainable labels coincides with another striking trend observed by Morningstar: a reversal in capital flows. In the first quarter of 2025, sustainable funds in Europe suffered net outflows of $1.2bn. This is a first since Morningstar began measuring this data in Europe in 2018. This reversal is all the more notable as it contrasts with the $18.1bn of inflows recorded globally by these same funds in the last quarter of 2024. In Q1 2025, outflows reached $8.6bn globally, marking the highest quarterly redemptions ever recorded for open-ended sustainable funds and exchange-traded funds (ETFs). The US saw its tenth consecutive quarter of outflows, amounting to $6.1bn. Only Canada, Australia and New Zealand saw inflows, attracting around $300m each.
Europe, long considered the leader in global ESG investing, is now reporting a pullback. In Q1 2025, it was mainly active strategies that suffered, losing $5bn. Although passive ESG funds managed to attract $3.7bn, this is an all-time low for them, representing a fall of 72% compared to Q4 2024. The organic growth rate of global sustainable funds thus fell from +0.54% in Q4 2024 to -0.27% in Q1 2025, while the fund universe as a whole showed positive growth.
There are several factors behind this negative trend, according to Morningstar’s report. Increased scrutiny of greenwashing is a major driver. But there is also the disappointing performance of some sustainable funds, particularly after Russia’s invasion of Ukraine, which favoured less sustainable energy companies. The recent arms race has widened the performance gap still further. Political headwinds and regulatory uncertainty are also weighing on performance. Donald Trump’s return to power in the United States and the anti-ESG movement--which is particularly strong across the Atlantic--are now impacting sentiment in Europe. European investors, already faced with changes to their own regulatory frameworks (such as the European Commission’s omnibus), are increasingly wary. Lack of bold leadership and eroding global alignment on climate goals have diminished confidence in ESG as a coherent investment thesis.
In the UK, new disclosure requirements (SDRs), fully effective in April 2025, have added a layer of complexity. Only 94 funds have adopted one of the four official sustainability labels, representing $47bn in assets. In contrast, 376 funds have opted for disclosures without a formal label, around half of which continue to use ESG-related terms such as “responsible” or “climate.” The UK scheme provides for a two-page “consumer-facing disclosure,” clear enough for anyone to understand and which includes key performance indicators so that the investor can verify the fund’s claims.
Despite these challenges and outflows, sustainable funds continue to manage no less than $3.16trn in assets worldwide. However, according to Hortense Bioy, head of sustainable investment research at Morningstar Sustainalytics, this quarter signals “a shift, not just in flows, but in the way sustainable investment strategies are perceived and positioned in the market.” Investor appetite for ESG funds will continue to be tested in the months ahead by an evolving regulatory landscape and growing geopolitical tensions.
“We are seeing a growing and increasingly diverse range of investment products targeting transition. Some of these products invest in companies focused on developing low-carbon energy capabilities. Others focus on companies that facilitate the transition, for example in the materials, industrial and technology sectors. Still others invest in transition leaders, i.e. companies with credible decarbonisation targets and transition plans. Still others invest in green bonds. There is a wide range of strategies. We have identified more than 1,600 mutual funds and ETFs worldwide with a climate-related mandate, representing around $570bn in assets,” she also said in an exchange with Sustainalytics president Ron Bundy.
This article was originally published in .