Market snapshot
Global product development in the sustainable fund sector has cooled markedly this year as a mix of weak performance, sustained investor withdrawals and heightened regulatory scrutiny has pushed asset managers to shutter funds and reconsider how they present sustainability to clients. Morningstar data show that Europe - the world’s largest market for these funds - saw just 13 fund launches in the second quarter, a record low and down from 35 in the same period a year earlier.
Closures outpaced launches by a wide margin in the quarter, with 64 funds taken off shelves. That translates to almost five closures for every new product, the widest such gap since at least the first quarter of 2023. In the United States, three U.S.-based sustainable funds were launched in the period while 22 closed. Asia ex-Japan recorded 16 new launches, all from China. Canada, Australia and New Zealand each experienced their second consecutive quarter without any new sustainable fund introductions.
Regulation and reputational risk
Product development has been constrained since 2022 by several forces, including political pushback in the United States against strategies that integrate environmental and social aims, sliding investor appetite following disappointing returns, and tougher European rules that have raised the bar for designating a fund as sustainable. Asset managers making sustainability claims have also faced closer examination: German prosecutors last year fined DWS 2 c25 million over statements authorities judged to be misleading, illustrating the reputational and financial risks involved.
"Regulatory uncertainty, greenwashing concerns and the political backdrop continue to influence both fund flows and product development," said Monika Calay, director of UK manager research at Morningstar.
Since the European Union tightened its disclosure rules in January 2023, Morningstar records show 956 ethical and sustainability funds have been removed from the market, compared with 691 launches over the same interval.
Sales caution and market positioning
Industry participants report clear reluctance among distribution teams to push new funds with sustainability labels. "You definitely see fewer funds coming to the market with a sustainability label on now," said Nicola Day, head of the Bristol office for James Hambro & Partners. "People are very cautious from the sales side."
The Investment Association, a trade body for the British fund industry, said it is tracking 103 open-ended funds that carry a sustainability label and that are approved by the UK regulator under the rules finalised in 2023. By way of scale, the UK retail fund market contains more than 4,000 funds overall.
Performance and investor reaction
Performance differentials have also weighed on demand. Asset managers and investors point to rising interest rates hitting sectors that had previously powered many sustainable strategies, such as renewable energy. Many investors who missed early gains have been left disappointed as sectoral performance shifted.
Over the five years to July 2026, data from LSEG show the broad MSCI ACWI index returned roughly 65 percent, compared with almost 56 percent for the socially responsible MSCI ACWI SRI index. "Much of this trend towards subdued demand for sustainable products has been driven by performance concerns," said Stuart Clark, portfolio manager at Quilter, noting that reduced exposure to fossil fuels and defence sectors weighed on some sustainable strategies.
Flows and product-level shifts
Morningstar flow data suggest that investors seeking sustainable exposure are becoming more selective. In the second quarter, sustainable funds recorded net inflows of $3.7 billion globally, largely into passive strategies and fixed income. Total sustainable fund assets stood at $3.73 trillion.
Regional flow patterns were uneven. Passive sustainable funds in Europe attracted about $11 billion in the quarter while active sustainable equity funds experienced outflows of roughly $7.8 billion. Sustainable fixed income products were a bright spot, gathering just over $14 billion, while sustainable equity funds lost around $9 billion.
In the United States, sustainable funds posted net inflows for the first time after 14 consecutive quarters of outflows, with passive products driving much of that reversal. Morgan Stanley analysts noted that funds defined as having a sustainable objective under EU disclosure rules outperformed conventional equity funds in the second quarter by 177 basis points, aided by technology holdings, though they still underperformed the MSCI ACWI index.
Investor preferences and messaging
Asset managers are responding to evolving client preferences by broadening the ways they describe sustainability goals. Some firms are framing objectives around resilience, energy security and risk management rather than a narrow focus on environmental idealism. "While clients were keen to invest in the world’s transition to a low-carbon economy, how they chose to invest was 'definitely more nuanced'," said Stuart White, executive director at Impax Asset Management, citing increased demand for fixed-income solutions.
Andy Ford, head of responsible investment at St James's Place, said many firms are shifting language and product positioning. "The big shift is that we’re getting away from sustainability being about trying to save the world," he said.
Outlook
With regulatory frameworks tightening, performance differentials persisting and distribution teams more cautious, the sustainable fund sector appears to be in a period of consolidation and recalibration. Managers that remain in the market are focusing on clearer definitions, stronger controls around claims, and product types that match current investor appetite such as passive strategies and sustainable fixed income.