Sustainable funds bloodied – but not beaten

The backlash against environmental, social and governance (ESG) investing is gaining pace, with fund managers in Donald Trump’s America leading the charge. 

New figures from market experts Morningstar lay bare how rapid the reversal has been: a record $8.6bn was withdrawn from sustainability funds in the first quarter of 2025, aligning with Trump’s tenure since being inaugurated in January. 

That is a sharp reversal from the previous three months, when $18.1bn flowed into those funds.

While it may be an exaggeration to say that sustainable investing is in crisis, since there is still $3.16-trillion in 7,428 of these funds globally, the trajectory will alarm asset consultants who had been punting this niche, and with considerable success. 

“An increasingly complex geopolitical environment – shaped in part by President Donald Trump’s return to the White House – has deprioritised sustainability concerns in Europe, including climate goals,” said analysts at Morningstar in a 47-page report last week. “Trump’s anti-climate agenda and anti-ESG policy measures, such as an executive order targeting diversity, equity, and inclusion, have introduced new legal risks.”

While the US has always been a bit player in these sustainability funds – accounting for just 10% of the market – this is the first time the Trump-led attack on these funds has spread across the pond too.

European sustainability funds – home to 84% of global ESG assets, also known as sustainable or responsible investment funds – just posted their first net outflows since Morningstar began tracking them in 2018, with $1.2bn pulled in the first three months of this year. That’s a dramatic U-turn from the $20bn in inflows seen in the previous quarter.

This is significant, as European funds have, until now, been largely resistant to the backlash from American politicians and more amenable to climate-change realities. In part, Morningstar says, this is because “the rollback in ESG commitments by US firms has created hesitation, undermining the sense of global alignment on climate and sustainability goals”.

In the US, there was a $6.1bn outflow – the 10th successive quarter of losses – with asset managers “adopting a more cautious approach” in promoting their ESG credentials and supporting sustainability issues, Morningstar said.

This is no surprise: senators from several states have spoken about “penalising” asset managers that invest in sustainability funds, putting pressure on the likes of BlackRock to retreat on their earlier commitments, for fear of losing pension mandates. 

As a result, 20 sustainability funds in the US closed, including the JPMorgan Sustainable Infrastructure ETF and the Amundi Climate Transition Core Bond.

Strong appetite in South Africa

Conway Williams, head of credit at the Cape Town-based asset manager Prescient Investment Management, says this moment is certainly not the end of responsible investing, but rather a response to a specific geopolitical moment in time. 

“The backlash has been driven by the US, which has certainly contributed towards ESG and sustainability investing losing momentum, but this is certainly not the end of the line globally,” he says. “In South Africa, for instance, we continue to see strong appetite for responsible and impact investing products from our clients, most notably from pension funds, but also from retail participants.”

Despite the negative press around ESG, Williams says the responsible investment narrative is still solid. He argues that in that turbulent first quarter, increased risk aversion and increased scrutiny on all funds has been a theme – not just ESG funds. 

While ESG has been demonised in the US as a “woke” investment tool that eradicates returns, he says that if used appropriately, it is a responsible mechanism to screen for potential problems.

“We use it as a risk-management tool, to systematically consider risks not always prevalent in pure financial analysis. For us, it is a mechanism to reveal which companies have or don’t have their houses in order,” he says.

The notion that ESG eradicates returns is also flawed, Williams adds. In Prescient’s case, its clean energy fund has grown fourfold in size in the past five years, delivering returns in excess of its benchmark of consumer price inflation plus 4.5% since inception a decade ago.

“At the moment, South African pension funds still allocate less than 2% of their assets to developmental or impact investments. This could easily double if we dispel myths about these types of funds and investments, which would have a significant impact on the country’s development narrative,” he says.

Nor is South Africa alone. While Europe struggled, these funds grew in Canada, Australia and New Zealand.

ESG jobs bloodbath

Nonetheless, the implications of this particular moment are many, including a change in fortunes for jobs being advertised in an industry which, until last year, only looked impregnable. 

Last week, Bloomberg reported that only 7% of people who took on a job with “ESG” in the title in 2020 still retain that position. 

Tom Strelczak, a partner at UK-based Madison Hunt, told the publication that financial firms had “overhired in a very evangelical and philosophical way”, and were now axing those jobs.

Companies are confronting the reality that the goal of generating the highest profits often “isn’t aligned with the social and environmental aspirations of the types of people they hired”, Strelczak was cited as saying.

For critics of ESG funds, this outflow will be seen as a vindication of the view that many of these funds were “sustainable” in name only, a marketing fad without substance designed to sucker pension funds into investing “for good”.

Frequent cases of “greenwashing” attest to this. In the past month, a global investigation, including journalists from the Daily Maverick, revealed that JPMorgan’s “sustainable funds” included a $250m investment in coal miner Glencore. 

So, it is deeply revealing that 90 funds, in response to the backlash against ESG, have now dropped the phrase “sustainable” or “sustainability” from their name, even though many of them continue with the same mandate as before.

For example, the PGIM European Corporate Bond was previously known as the PGIM European Corporate ESG Bond Fund. 

Morningstar said while this fund no longer says overtly that it applies ESG principles in selecting shares, when you scrutinise its mandate, it continues to “analyse securities based on ESG criteria” and avoids investing in companies that “are not in compliance with certain socially responsible investment criteria”.

There are others too. The Amundi MSCI Robotics and AI ETF was previously known as the Amundi MSCI Robotics and AI ESG Screened ETF. 

Nonetheless, this Amundi fund continues to exclude companies involved in certain controversial businesses or with relatively low ESG ratings.

It seems remarkable that funds premised on virtue signalling their sustainability credentials are now going out of their way to hide this. As if “doing good” has quickly become a dirty concept.

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