Environmental, Social, and Governance (ESG) investing has grown significantly over the past decade. Yet, recessions tend to test the commitment of investors and fund managers alike. During economic downturns, ESG funds often experience notable shifts in strategy and capital flows as stakeholders re-evaluate their priorities. In this article, we look at how ESG strategies are evolving in the current uncertain economic climate.
Recessions typically occur in periods of volatility and lead to risk aversion – traits that can suppress inflows into specialised strategies like ESG. But is the latest market wobble and threat of recession causing outflows from sustainable funds, or is this just the extension of a broader trend that was already underway?
A recent analysis of equity fund flow data from Morningstar in a report from Goldman Sachs shows that sustainable equity funds saw continued modest outflows in February 2025, totalling -$3.0 billion. Regionally, these were led by North America (-$2.7 billion), with Western Europe (-$0.3 billion) and the rest of the world (-$0.1 billion) contributing less significantly.
This marks a continuation of a broader trend in fund flows, particularly affecting thematic strategies – which focus on targeted sustainability themes like clean energy or water security. Thematic ESG funds recorded -$3.3 billion in outflows in February, extending a 20-month losing streak.
A notable shift in all fund strategies during downturns is the pivot from actively managed funds to passive instruments. Fund flow data highlights that while active sustainable equity flows were negative across all regions (-$4.0 billion), passive strategies managed modest net inflows of +$0.9 billion, largely thanks to Western Europe (+$1.2 billion).
This preference for passive ESG products reflects a wider industry trend: investors tend to favour lower-fee, diversified options when uncertainty looms. As an example, ESG-focused ETFs – especially those with broad-based sector exposure – have shown slightly more stable relative performance, offering a haven for ESG-conscious investors during turbulent times.
While thematic funds are seeing withdrawals, ESG integration strategies – where sustainability is embedded within a broader investment framework – are showing relative resilience. Integration flows were marginally positive (+$0.1 billion) in February 2025, underscoring investor preference for ESG approaches that offer flexibility and do not heavily rely on single-sector exposures.
Interestingly, Europe continued to dominate this trend, with integration inflows of +$2.4 billion offsetting outflows elsewhere. This suggests that regional regulatory support and investor maturity may play a stabilising role in ESG strategies during downturns.
Despite the negative flows recorded recently, the Goldman Sachs report finds that most sustainable investment asset managers are not abandoning their ESG strategies. Instead, many are adjusting fund labels in response to new regulations, particularly in Europe. For instance, 144 funds removed sustainability-related language from their product names in January and February 2025 alone, up from just 62 during all of 2024 – a response to the European Securities and Markets Authority’s (ESMA) new naming guidelines.
However, this rebranding does not necessarily mean a strategic pivot away from ESG. Fewer than 3% of the 4,600 funds in the GS research universe have removed ESG references so thoroughly that they no longer qualify as sustainable investments.
Looking forward, while ESG funds are facing headwinds in a recessionary environment, the fundamental principles remain intact. Investors are shifting toward passive, diversified ESG strategies and integrated approaches, and while some thematic funds are seeing performance drag due to macroeconomic pressures, the broader trend toward sustainable investing shows resilience.
The flow of sustainable funds data paints a nuanced picture: one of an evolving, adapting ESG landscape rather than a hasty retreat. Fund managers are tweaking labels and strategies, but not the underlying mission – underscoring the staying power of ESG in long-term capital allocation.
