In the first quarter of 2025, European sustainable investment funds experienced unprecedented challenges, with assets under management (AUM) declining by approximately €1 trillion. This downturn was primarily driven by significant outflows from Article 9 funds—those with the strictest sustainability criteria under the EU’s Sustainable Finance Disclosure Regulation (SFDR)—and intensified by the European Securities and Markets Authority’s (ESMA) new labeling rules aimed at curbing greenwashing.
Key Trends and Regulatory Impact
According to LSEG Lipper’s “Everything Green Flows” report, AUM in Article 9 funds plummeted from €344.89 billion to €251.1 billion, marking the steepest decline among sustainable fund categories. Conversely, Article 8 funds, which promote environmental and/or social characteristics, saw a decrease from €8.03 trillion to €7.07 trillion .
The downturn in Article 9 funds is attributed to several factors:
- Regulatory Reclassifications: Approximately 350 funds were downgraded from Article 9 to Article 8 following ESMA’s clarification that Article 9 funds should hold only sustainable investments, excluding cash and assets used for hedging purposes .
- Investor Caution: The introduction of stricter labeling rules in May 2025 led to 757 funds removing ESG-related terms from their names, reflecting a broader trend of reclassification and reduced investor appetite for funds lacking clear sustainability mandates .
- Market Volatility: Global economic uncertainties and geopolitical tensions contributed to a shift in investor preference towards traditional equity strategies, with equity funds experiencing outflows as investors sought more stable returns .
Sector-Specific Dynamics
Despite the overall decline, certain sectors exhibited resilience:
- Fixed-Income Funds: Article 8 bond funds attracted €41.27 billion in net flows, while Article 9 bond funds saw €14 billion in inflows, indicating a continued investor preference for sustainable fixed-income assets amid high global interest rates .
- Equity Funds: Sustainable equity funds in Europe remained the best-sellers in their category, drawing €14.91 billion, although this was insufficient to offset the broader outflows .
Outlook
The first quarter of 2025 marks a pivotal moment for sustainable investing in Europe. While the regulatory landscape continues to evolve, the market’s response underscores the need for clarity and consistency in sustainability classifications. Investors and fund managers will need to navigate these changes carefully to align with both regulatory requirements and shifting market dynamics.
