Clearing the ground for sustainable growth

Morningstar’s 2025 year‑in‑review has landed to the now all-too-familiar round of hand-wringing over the “death” of sustainable investment.

It is an easy narrative to take in: falling numbers, fading interest, the end of the industry as we know it. And yes, looking at the figures the report shows around outflows and fund closures it’s not easy to feel any particular optimism about the future of sustainable investment.

Digging slightly deeper into the figures over the past five years, however, you start to see a different picture. Reports like these are useful precisely because they cut through that narrative, helping to separate what happened from what changed, and, crucially, what those changes mean for clients.

Fund landscape: From proliferation to credibility

Over the past five years, sustainable investing has gone through as much a marketing boom as an investment one. Funds spawned seemingly exponentially under a growing list of categories: “ESG”, “green”, “ethical”, “responsible” and more, often creating more confusion than clarity.

At the peak of green enthusiasm in 2021, roughly 200 funds launched per quarter. While that might have seemed like positive momentum at the time, the reality is that many of those funds were no different to mainstream portfolios. Ambiguity around definitions, and, at times, over‑enthusiastic marketing, made it far too easy for greenwashing to creep in and chip away at consumer confidence.

That trust deficit wasn’t just anecdotal, it was measurable, actively harming market sentiment. Ahead of the introduction of the UK’s Sustainability Disclosure Requirements (SDR), an FCA study found that seven in 10 people didn’t believe a fund labelled “sustainable” actually was.

What followed was both necessary and, in hindsight, inevitable. Regulation tightened, and, as the macro backdrop became more challenging for the whole industry, a correction followed. As the charts below show, launches fell and closures accelerated – so much so that by 2024, closures outstripped launches for the first time since Morningstar’s records began.

The ensuing reshaping of the industry has been rapid and significant.

Since early 2024, around 1,600 funds have removed ESG‑related terms from their names, about 29% of Morningstar’s sustainable coverage. The UK numbers make the point even more clearly. As at December 2025, Morningstar data showed 121 funds had adopted a UK sustainability label, while 435 chose not to – meaning roughly 80% of the previously self‑identified “sustainable” universe opted against labelling.

Read negatively, that looks like contraction. Read practically, it looks like a long‑overdue correction. Today’s universe of funds is smaller but more credible: strategies are clearer about what they do and why, and greenwashing is far rarer – without a doubt a good thing for clients. While implementation still has a way to go, these regimes are building the foundations of quality and trust that are essential to the future growth of the industry.

Assets are still rising, despite headline noise

The outflows in 2025 were fertile ground for negative headlines. But the detail beneath these headlines is important. A meaningful share of these outflows was created by large UK institutions redeeming from pooled vehicles and reallocating into bespoke ESG mandates. Because those mandates are not captured in Morningstar’s fund database, the shift can be misread as a retreat from ESG when it is, instead, a move toward customisation in a more polarised environment.

Even more importantly, the most telling indicator of underlying health – assets under management – has continued to rise. Global sustainable fund AUM rose again in 2025 and while this was in part due to market appreciation, that growth is still notable in a year that was particularly tough for active equities, which still dominate the sustainable fund universe. If we look back over the period since Morningstar’s records began in 2018, assets have increased more than six‑fold, pointing to a kind of resilience that is often obscured by short-term flow data.

The path forward

While progress is being made, there’s still a palpable gap between what people say they want to achieve with their money and where it’s actually put to work. The same FCA study referenced earlier found that while 81% of people want their money to “do good as well as deliver a return”, only around 7% of assets sit in sustainable, responsible or ethical funds.

That’s why the consolidation highlighted in Morningstar’s report shouldn’t be read as a death-rattle. We believe it is better understood as a reset – one we believe is essential to closing this “intention gap”.

When over 80% of people say they want their money to do good, and the fund universe is becoming clearer, more accessible and more credible, the potential is obvious. The opportunity is there to bridge the gap and open up access to the next stage of sustainable investment growth.