Sustainable investing: Net inflows and relative returns slide

[SINGAPORE] Is sustainable investing on the rise or in retreat? It depends on which data set you examine.

Morningstar Sustainalytics’ data on inflows and returns from sustainable investments paints a negative picture. Amundi Asset Management’s data is somewhat more optimistic.

Fund flows data from Morningstar reflects net outflows from global sustainable funds in 2025 of US$84 billion, compared to net inflows of US$38 billion in 2024.

The US sustained net outflows for 13 consecutive quarters, which isn’t a surprise given the backlash in the country against ESG. But the rest of the world recorded outflows too.

Morningstar said the US’ explicit anti-ESG stance and shift towards deregulation has, in turn, “prompted Europe to scale back its ambitions related to sustainability-related disclosure regulations and to prioritise its growth and competitiveness”.

“In this volatile political and policy environment, many investors questioned whether companies would stick to their sustainability commitments,” it said.

Performance of Morningstar sustainability indices relative to market-cap indices was poor. Just 26 per cent of ESG indices outperformed their non-ESG equivalents in 2025 compared to 45 per cent in 2024.

In Amundi’s study, Europe had a 95 per cent share of global inflows into responsible investments (RI) of 169 billion euro (S$252.7 billion) in 2025. This suggests relatively weak appetite in the rest of the world.

In terms of returns, Amundi’s study shows ESG variants of the MSCI World index outperformed. Over one year to end-October 2025, a screened variant outperformed the MSCI World by 20 basis points, and 40 basis points over 10 years.

Estimates of total assets under management (AUM) in sustainable or RI funds also varied. Morningstar has the AUM at US$3.9 trillion at end-2025.

Amundi’s estimate, using Broadridge data, is 11.2 trillion euro by end-2025, a rise of about 8 per cent from around 10.3 trillion euro in 2024.

Amundi deputy chief executive Jean-Jacques Barberis believes responsible investing has reached a phase of maturity.

“Five to six years ago, especially in Europe, there was a huge movement because of regulation, client demands and the voluntary commitment of the financial industry to transform a large part of the assets by… managing (them) with RI objectives or integrating RI criteria.”

Investors, he said, have also come to understand that RI isn’t monolithic, and performance will be differentiated depending on how the funds are constructed. “People have realised that sustainable investment funds, as with any other financial products, have their own construction biases.”

A low weighting towards fossil fuel energy, for instance, will exact a performance penalty when oil rises above US$100.

“I think everyone has realised that a sustainable product, as with any financial product, will behave differently in different market conditions. It’s not a magic product that will always generate a positive return,” said Barberis.

He also believes that RI has “massively matured” in terms of stewardship and engagement of corporates.

Performance differentiation

In terms of performance, Morningstar noted that its three main categories of sustainability indices – climate, ESG risk and impact-aligned – all struggled against their non-ESG counterparts in 2025. The relative performance in 2025 was the second worst since 2018.

For this, it blames the dominance of a handful of mega-cap stocks tied to the artificial intelligence theme. “Their outsized influence created a market environment where outperforming a broad benchmark became increasingly difficult for any approach that didn’t fully embrace this concentrated leadership.”

Strong performance of carbon-intensive sectors, including precious metals, also hurt the relative returns of sustainable indices that target lower emissions.

For Morningstar, construction of its sustainable indexes also resulted in the exclusion of two of the Magnificent 7 stocks: Alphabet and Meta.

Morningstar Sustainalytics employs a “controversy rating” to assess companies’ involvement in media-reported ESG incidents, taking into account real-world impacts on stakeholders, the environment and the potential financial materiality for the company.

All companies with a controversy rating above three, reflecting a high or severe stakeholder or environmental impact or elevated financial risk, are excluded.

“While such exclusions can help mitigate headline and reputational risk, they may also create performance trade-offs,” said Morningstar. Meta and Alphabet have a controversy rating of four.

In 2025, the Morningstar US Sustainability Index underperformed its parent benchmark by 3.5 percentage points, with about 2.7 percentage points of that due to the strong performance of Alphabet.

The company’s rating of four is due to anti-competitive practices. “Ongoing legal and regulatory actions increase the risk of structural remedies, fines and mandated changes to Google’s core business practices.”

The single bright spot was renewable energy. This segment benefited from a lower interest rate environment, a tailwind for project financing and equity valuation.

Electricity demand also accelerated, thanks to data centre expansion linked to AI adoption and the ongoing electrification of transportation and industrial activity.

“Heightened geopolitical tensions reinforced energy security considerations, prompting governments and corporates to diversify energy sources and reduce reliance on imported fossil fuels,” said Morningstar.

Barberis said that it is “important to be extremely transparent with clients on the implications of some choices” within sustainable funds.

“We also strongly believe there is an opportunity today. The current geopolitical situation is leading countries, in Europe in particular, to engage more into the transition, and to deploy capital into sectors and technology in support of the transition,” he added.

“It’s interesting to see that countries that have electrified the most are the ones much more protected against the variations of oil prices with the current geopolitical constraints.”

Asset managers’ climate commitments

Investors who wish to invest sustainably should take into account how their fund managers approach their stated sustainable objectives, and whether the managers walk the talk.

Recent reports paint a bleak picture.

ShareAction, an independent charity, published a report, Point of No Returns 2025, an effort to benchmark 76 of the world’s largest asset managers.

It found that the poorest performers, graded “E” or “F”, included some of the world’s largest managers, such as BlackRock and Fidelity. The best-ranked managers are mostly European; Robeco has topped the ranking for the third time.

The report contends that while many asset managers say they recognise the importance of responsible investment, “the more concrete parts of the policies – such as targets and formal restrictions – apply only to a very small proportion of the funds”.

InfluenceMap’s 2023 Asset Managers and Climate Change assessment of 45 of the largest managers showed that the firms “have not made significant progress on their climate goals since 2021, despite an increase in climate targets”.

The managers, representing US$72 trillion in AUM, continue to manage portfolios misaligned with the Paris Agreement goals, while efforts to drive transition through stewardship have “stagnated”.

Of some US$16.4 trillion of asset managers’ equity portfolios, 95 per cent were misaligned with the Paris Agreement goals.

In the assessed sample, asset managers also collectively hold 2.8 times more equity value in fossil fuel production companies (US$880 billion) than in green investments (US$309 billion), it said.