Firms rebrand green funds around resilience, energy security, and plain risk
Asset managers launched a record low number of sustainable funds in the second quarter, as weak returns, steady investor withdrawals, and tighter regulation pushed firms to close products and rethink how they sell sustainability.
Data from Morningstar shows Europe, the world's largest sustainable fund market, launched just 13 funds in the quarter, down nearly two-thirds from 35 a year earlier.
With 64 funds closing over the same stretch, nearly five European funds shut for every one that opened, the widest gap since at least the first quarter of 2023.
Managers launched three funds in the United States against 22 closures, while all 16 new funds in Asia ex-Japan came from China, the firm found.
Canada, Australia, and New Zealand recorded their second straight quarter without a single launch.
Investors who still want these products are choosing more carefully.
Morningstar said sustainable funds drew a net US$3.7bn in the quarter, most of it into passive strategies and fixed income, while total assets reached a record US$3.7tn on strong market gains.
Passive sustainable funds pulled in about US$11bn in Europe even as active funds shed US$7.8bn, and fixed income strategies gathered just over US$14bn while equity funds lost around US$9bn.
In the United States, sustainable funds returned to net inflows for the first time in 14 quarters, driven mainly by passive products, according to Morningstar.
Product development has been shrinking since 2022.
Reuters reported that three forces have pressured the market.
A US political backlash against environmental, social and governance (ESG) investing and softer demand after a stretch of weak returns have hurt, as have European Union (EU) rules that make it harder to label a fund sustainable.
Regulators have also sharpened their focus on sustainability claims.
German prosecutors last year fined DWS €25m over marketing statements they judged misleading, in one of Europe's largest greenwashing cases.
Calay said regulatory doubt, greenwashing concerns, and the political mood keep steering where money goes and which products reach the market.
Monika Calay, director of UK manager research at Morningstar, counts 956 ethical and sustainability funds pulled since the EU tightened its rules in January 2023, against 691 launches over the same span.
Fewer funds now arrive carrying a sustainability label, said Nicola Day, who heads the Bristol office of James Hambro & Partners.
"People are very cautious from the sales side," she said.
The Investment Association, a British fund trade body, said it now tracks 103 open-ended funds approved under the UK's sustainability label, a small share of a retail market holding more than 4,000 funds.
Performance has been part of the drag.
Over the five years to July 2026, the broad MSCI ACWI index returned roughly 65 percent, against almost 56 percent for its socially responsible counterpart, LSEG data showed.
Morgan Stanley analysts said funds with a sustainable objective under EU disclosure rules beat conventional equity funds by 177 basis points in the quarter, helped by technology holdings, though they still trailed the broad index.
Faced with the political climate, many firms now frame their funds around resilience, energy security, and risk rather than saving the planet.
Andy Ford, head of responsible investment at St James's Place, said the sector was moving away from treating sustainability as an effort to "save the world."
Canada has held up better than most on the flow side.
ESG exchange-traded funds (ETFs) sold in Canada took in $539m in June, up from $281m a month earlier, though the month also brought one delisting, the BMO MSCI ACWI Paris Aligned Climate Equity Index ETF, Investment Executive reported.
Some of the retreat reflects a shakeout of firms that piled in during the boom.
Sucheta Rajagopal, a Toronto-based responsible investment adviser, told Corporate Knights last year that many managers launched products chasing the trend, with "a lot of bandwagon-jumping."
