Trump-Fueled Backlash Intensifies Flight from ESG Funds, Morningstar Finds

The ESG investment movement, once hailed as a transformative force in global finance, has faced its most significant test in years. A new Morningstar report reveals that geopolitical tensions, regulatory rollbacks, and a growing anti-ESG sentiment have driven record outflows from sustainable funds in 2025—marking a stark reversal of earlier momentum.

The Numbers Tell a Dire Story
In Q1 2025, global sustainable funds saw $8.6 billion in outflows, the highest on record, while the U.S. alone recorded $6.1 billion in withdrawals, extending its 10-quarter streak of redemptions. Over two years, U.S. sustainable funds have lost $32.9 billion in total—$19.6 billion in 2024 and $13.3 billion in 2023. This exodus contrasts sharply with conventional funds, which attracted $740 billion in inflows in 2024 as investors flocked to AI-driven equities and interest-rate-sensitive assets.

Performance Lags Fuel Skepticism
Underlying the outflows is a persistent underperformance of ESG funds. Only 42% of U.S. sustainable funds ranked in the top half of their Morningstar categories in 2024—a sharp decline from previous years. Sustainable large-blend equity funds lagged conventional peers by 0.8 percentage points, with median returns of 20.7% versus 21.5% for traditional funds. Even fixed-income ESG assets, which fared better, saw only 48% of funds in the top quartile.

The underperformance has eroded confidence. “Investors are voting with their wallets,” said a Morningstar analyst. “When ESG funds can’t deliver on both values and returns, the compromise becomes harder to justify.”

Political Winds Shift the Tide
The backlash is deeply intertwined with U.S. political actions. The Trump administration’s 2025 policies—including withdrawal from the Paris Agreement, restrictions on EV subsidies, and dismantling of diversity, equity, and inclusion (DEI) mandates—ignited a firestorm of anti-ESG rhetoric. State-level legislation in 18 Republican-led states banned public pensions from investing in ESG funds deemed “anti-American,” while federal agencies axed DEI requirements for federal contractors.

These moves hit corporate ESG commitments hard. Walmart, Lowe’s, and Meta all scaled back DEI initiatives, citing regulatory uncertainty. “When the government turns against ESG, companies follow suit,” noted the report. “The message to investors is clear: ESG is a political liability.”

A Paradox of Demand and Disillusionment
Despite the outflows, investor interest remains. A Morgan Stanley survey found 54% of individual investors still plan to increase ESG allocations, while 78-80% of asset managers expect sustainable assets to grow over two years. Yet this optimism clashes with reality. The disconnect highlights a critical issue: trust in ESG’s execution.

“Investors want ESG, but they’re disillusioned by greenwashing and policy flip-flops,” said a fund manager. “Without transparency and consistency, the sector can’t recover.”

The Global Picture: Europe Buckles, Asia Innovates
Europe, long an ESG leader, saw its first net outflows since 2018—€7.6 billion—as the EU tightened anti-greenwashing rules. Over 300 European funds dropped ESG labels, while defense stocks, once ESG pariahs, were rebranded as “critical infrastructure” amid rearmament post-Ukraine. Meanwhile, Asia-Pacific funds, less politicized, grew by $128 billion in 2024.

New launches in the U.S., however, are scarce. Only 10 sustainable funds debuted in 2024, while 71 closed and 24 dropped ESG mandates. The survivors are often passive, with Invesco’s climate-focused ETFs (KLMN, KLMT) attracting $4 billion and KraneShares’ KCSH netting $224 million.

Conclusion: ESG’s Crossroads
The 2025 data paints a bleak present but hints at a resilient future. Sustainable assets remain at $344 billion in the U.S.—a 6.3% annual increase—while global assets hit $3.2 trillion. Yet, the sector’s survival hinges on three factors:

1. Policy stability: California’s climate mandates and EU regulations offer hope, but federal uncertainty persists.
2. Performance revival: ESG funds must close the 0.8 percentage point gap with conventional peers to regain credibility.
3. Transparency: Investors demand clearer metrics to combat greenwashing.

The outflows of 2025 are a reckoning, not a death knell. As Morningstar notes, “ESG’s core premise—long-term sustainability—still resonates. The question is whether the industry can adapt fast enough to survive the backlash.”

In a world where politics and performance collide, ESG’s fate hangs in the balance.