For several years, ESG investing appeared to be one of the strongest trends in retail investing. Investors wanted portfolios to reflect more than financial returns alone, while asset managers responded with a growing range of sustainable ETFs, ethical portfolios and climate-focused funds.
That momentum has slowed, with geopolitical uncertainty, social debate and changing market conditions all contributing to a more cautious investor mood. Across global markets, sustainable funds have faced tighter scrutiny and greater scepticism from investors. In the first quarter of 2025, ESG funds recorded $8.6 billion in net outflows globally, while Europe became a net seller of sustainable funds for the first time since 2018.
In the UK, wider fund withdrawals have reflected similar caution, with cost-of-living pressures and economic uncertainty pushing many savers to prioritise liquidity, income and perceived safety.
When taken together, they suggest a soft reset regarding this form of investment. Investors may not have stopped caring about sustainability, but they are becoming less willing to accept broad labels at face value. They want clearer evidence on performance, fees, income, risk and what ESG funds actually hold.
WHY ESG HAS LOST MOMENTUM
ESG has faced a tougher environment for several reasons. The first is performance: Many sustainability-focused funds have had to compete in markets dominated by large US technology companies, energy stocks, defence spending and higher interest rates. Funds that excluded certain sectors or leaned heavily towards renewable energy and growth companies have, in some periods, struggled to keep pace with broader market returns.
The second is cost: In a higher inflation environment, investors have become more sensitive to fees and outcomes. For someone investing through an ISA or building long-term wealth, an ethical label is unlikely to be enough if the fund is expensive, underperforming or difficult to understand.
The third is trust: Concerns around greenwashing, vague labels and inconsistent definitions of what counts as sustainable have made investors more cautious. Regulators have responded with tougher rules, including the FCA’s Sustainability Disclosure Requirements and investment labels regime in the UK. That should improve transparency over time, but it has also forced fund managers to reassess how products are named, marketed and positioned.
The result is a more demanding investor market. Investors want to understand whether a fund is genuinely aligned with their values and whether it can still deliver competitive long-term outcomes.
RETURNS STILL MATTER
The idea that investors have abandoned ethics for returns is too simplistic, most investors do not make decisions based on values or performance in isolation. They try to balance both.
The balance can change when financial pressure increases. An investor who was comfortable contributing to an ESG fund during a rising market may feel differently when mortgage costs, food bills and energy prices are higher. At that point, investing becomes more practical. Is this investment helping them meet their financial goals?
That question is particularly important for dividend-focused investors. ESG funds can produce different income profiles from traditional funds, especially if they exclude sectors such as oil and gas, mining, tobacco or defence. Some investors may be comfortable with that trade-off. For others, it can have a meaningful impact on income.
Sustainable investing should not rely on broad labels or emotional appeal. It needs to be assessed in the same way as any other investment: performance, income, fees, risk, concentration and suitability.
THE PORTFOLIO VISIBILITY PROBLEM
One of the most common issues for modern investors is that they hold assets across several platforms. They may have an ISA with one broker, a general investment account elsewhere, a pension platform, several ETFs, individual shares and perhaps alternative assets too.
In that environment, it becomes difficult to understand whether ESG exposure is genuinely part of a strategy or simply something added on top. An investor might own a sustainable global equity fund, a broad market ETF and individual shares that overlap with both.
Without a consolidated view, they may not know how much exposure they have to certain sectors, regions, companies or currencies. A broker dashboard may show the return on one account, but not the full impact of dividends, fees, currency movements and holdings across the whole portfolio. That makes it harder to judge whether an ESG allocation is helping or hindering long-term outcomes.
ESG NEEDS TO BE UNDERSTOOD, NOT ASSUMED
The future of ESG investing may be less about accepting fund labels and more about understanding the themes underneath them. Investors may still care about climate risk, governance quality, energy transition, supply chain resilience and corporate accountability. But they are likely to want more proof that these themes are reflected in the actual holdings and do not undermine the role the investment is meant to play.
For retail investors, the key question is not simply whether an investment carries an ESG label. It is whether that investment contributes to their overall objectives and has a clear role within the portfolio. That requires visibility across all holdings, rather than relying on fragmented broker views or manual spreadsheets.
LOOKING AHEAD
ESG investing is going through a soft reset, the early phase, driven by enthusiasm, product growth and broad investor appetite, is giving way to a phase defined by performance, transparency and proof. Values in investing still matter. But so do costs, income, long-term returns and goals. A sustainable investment that is poorly understood can create risks investors did not intend to take.
Better investing starts with better visibility. As portfolios become more complex, investors need to see the full picture of performance, income, fees, currency effects and diversification. Only then can they decide whether ESG belongs in their portfolio, how much exposure they want and whether those investments are aligned with both their financial goals and personal values.
