Dive Brief:
- Investors put more cash into traditional funds than sustainable funds in the first half of 2025, but they generated lower returns, according to a recent report by the Morgan Stanley Institute for Sustainable Investing.
- Sustainable funds had net inflows of $16 billion during the first half of the year, the Sept. 8 report found. That figure was 0.5% above the prior year-end assets under management, compared with 2.1% for traditional funds.
- During the first half, median returns for sustainable and traditional funds were 12.5% and 9.2%, respectively, “marking the strongest period of outperformance for sustainable funds since the [Morgan Stanley Institute for Sustainable Investing] began tracking data in 2019,” the report says.
Dive Insight:
Sustainable funds have outperformed traditional ones since at least December 2018, with total returns of 54% and 45%, respectively, according to a Morgan Stanley analysis of Morningstar Data.
Thanks to better returns, total AUM for sustainable funds reached an all-time high of $3.92 trillion in assets in the first half of 2025. In addition, 92% of sustainable funds had positive returns compared with 85% for traditional funds.
The report found that sustainable funds outperformed “within most regions, and across all asset classes.”
Sustainable funds now represent 6.7% of the total AUM, a 0.1 percentage point increase from 6.6% at the end of 2024. That figure, however, is down from 7.3% in June 2023, as traditional funds have had greater net inflows. Net inflows for sustainable funds have begun to decline, falling from over $100 billion in 2022 and 2023 to just $80 billion in 2024.
Still, sustainable funds showed signs of life during the second quarter, with net inflows more than offsetting small outflows during the first quarter.
The report attributed the outperformance of sustainable funds compared to traditional ones to the former having greater exposure to Europe and other global markets. While traditional funds invested in those markets, too, Morgan Stanley said they also had greater exposure to the Americas and Asia-Pacific region.
Additionally, sustainable funds based in Europe continue to see greater net inflows than those domiciled in other regions and control 88% of total AUM in sustainable funds, according to the report.
During the first half, Europe-domiciled sustainable funds had $24.7 billion in inflows compared to just $2.7 billion in Asia. However, when looking at net flows as a percentage of prior year-end AUM, Asia-domiciled sustainable funds performed the strongest in H1, seeing a 2.6% increase,which was more than threefold higher than those based in Europe, which saw a 0.8% increase.
Sustainable funds domiciled in North America, meanwhile, have reported outflows since the fourth quarter of 2022 — 11 quarters in a row. During the first half, North America-domiciled funds saw net flows as a percentage of prior year-end AUM decline 3.3%.
