Sustainable Reality: Positive Returns Offset Outflows During 2H 2025

Report by Morgan Stanley (2026) | Industry Insights

by Alexandra Faciu

Montréal, Canada

Morgan Stanley has recently published their latest Sustainable Reality Report and highlights a pivotal shift in sustainable investing. As a long‑running series from Morgan Stanley’s Institute for Sustainable Investing, it draws on Morningstar data covering 110,000 global funds, offering a clear, data‑driven view of how the sustainable funds market is evolving. Its findings - record AUM paired with declining market share, renewed outflows, and increasing regulatory pressure - show a sector moving from rapid growth to more disciplined, performance‑focused scrutiny. These insights help readers anticipate changing investor behavior, refine sustainable product strategies, and compete more effectively for capital in a more demanding market environment.

Key takeaways:

• Global sustainable investing closed 2025 in a position defined by both strength and fragility. Assets under management reached an all‑time high, yet the sector’s share of global AUM continued to shrink as traditional funds attracted stronger inflows. The year illustrated a maturing market facing structural headwinds, shifting regulatory dynamics, and evolving investor behavior, even as long‑term performance remained resilient.

• By the end of December 2025, sustainable fund AUM rose to $4.13 trillion, a 4% increase from mid‑year and more than 16% higher than a year earlier. This growth, however, did not translate into greater market share. Sustainable funds accounted for just 6.5% of global AUM, down from 6.8 % in June and below the 7.2% peak reached in mid‑2023. The decline was not driven by asset erosion but by the comparatively faster expansion of traditional funds, which benefited from stronger and more consistent inflows throughout the year.

• Fund flows marked the clearest sign of pressure. After modest inflows in the first half of 2025, sustainable funds saw a sharp reversal, with outflows of $86.4 billion in the second half. For the full year, net outflows totaled $62.8 billion, or 1.8% of prior year‑end AUM. Europe, long the anchor of global sustainable investing, recorded its first annual outflows at $76.4 billion. Much of this was technical: UK asset owners shifted from pooled sustainability vehicles to bespoke mandates not captured in Morningstar’s dataset. Even after adjusting for this reallocation, Europe still posted slight net outflows, signaling a broader cooling of momentum. North America extended its multiyear pattern of withdrawals, marking its twelfth and thirteenth consecutive quarters of outflows. Asia stood out as the only region with positive flows in the second half, though at a modest 0.6% of AUM.

• Regulatory classifications showed a divergence in investor preference. Article 8 funds, which promote environmental or social characteristics, attracted more than $527 billion in inflows, equal to 6.5% of their AUM. Article 9 funds, which must demonstrate sustainability as a primary objective, continued to contract, with outflows of $23 billion and nine consecutive quarters of negative flows. This pattern reflects ongoing regulatory scrutiny and investor caution around the most stringent sustainability labels.

• Performance in the second half of 2025 was competitive but slightly behind traditional peers. Sustainable funds delivered a median return of 5.3%, trailing by 22 basis points. The gap was largely attributable to geographic exposure: sustainable funds are heavily weighted toward Global and European assets, both of which underperformed other regions during the period. On a regional basis, sustainable funds actually outperformed traditional peers almost everywhere, with excess returns ranging from 40 basis points in Europe to more than 700 in the Middle East and Africa. Across asset classes, sustainable funds lagged in equities, fixed income, and multi‑asset strategies, yet 89% still produced positive returns, compared with 84% of traditional funds. Over the longer term, sustainable funds continued to lead: a $100 investment in 2018 would have grown to $162 by the end of 2025, versus $152 for traditional funds.

• Europe remained the global center of exclusionary screening, with high adoption of restrictions on controversial weapons, thermal coal, and tobacco. In private markets, impact investing surpassed $1 trillion in AUM, though fundraising slowed sharply from its 2022 peak. Venture capital accounted for the largest number of impact funds, while real assets dominated by capital deployed. PitchBook notes that fundraising totals are often revised upward, suggesting 2025’s muted figure may ultimately prove higher.

Disclaimer: SAM Curated, the curators and any other guests invited to share their opinions assume no responsibility or liability for any errors or omissions in the content of this site and/or email generated by this site. Please note that the information on this site is provided on an “as is” basis, with no guarantees of completeness, accuracy, usefulness or timeliness.