Investor Action in Sustainable Finance: Assessing the Reality of ESG Backlash

In the past two years, sustainable finance has transitioned from a niche segment of capital markets to a central topic in political discourse. This change has been particularly pronounced in the United States, where environmental, social, and governance (ESG) considerations have become highly politicised and integrated into broader public debate.

Prominent net-zero coalitions that previously represented collective investor ambition are now experiencing significant challenges. For example, the Glasgow Financial Alliance for Net Zero (GFANZ) [8], established in 2021 as a leading coalition of financial institutions committed to aligning portfolios with net-zero emissions, has recently experienced notable withdrawals. In response to increasing legal risks and heightened political scrutiny in North America, several major U.S. banks, including JPMorgan Chase, Morgan Stanley, Goldman Sachs, Wells Fargo, Citibank, and Bank of America, have either withdrawn or reduced their public commitments [1]. Similarly, the Net Zero Asset Managers initiative has suspended its climate-target tracking and removed public targets from its website, marking a symbolic retreat from the visibility that previously characterised the alliance era [2].

The Financial Times [8].

These developments have fuelled claims that ESG momentum is fading. Yet the evidence suggests something more complex.

Fragmentation in the Global Sustainable Finance Landscape

The global trajectory of sustainable finance is far from uniform. While political resistance has intensified in some jurisdictions, particularly in the United States, Europe continues to consolidate sustainability within mainstream investment architecture.

Although recent fund flows have been volatile, European markets maintain a strong structural commitment to climate and ESG integration. According to Morningstar, global sustainable funds recorded net outflows of approximately USD 27 billion in the fourth quarter of 2025, following nearly USD 55 billion in outflows in the third quarter. However, total assets rose to approximately USD 3.9 trillion by year-end, driven by market appreciation [3].

Morningstar [3].

Since 2018, global sustainable fund assets have expanded more than sixfold, increasing from approximately USD 600 billion. This expansion is attributed to greater investor awareness of climate risks, supportive European regulatory frameworks, enhanced ESG data quality, and continued product innovation [3].

Some of the outflows in 2025 resulted from structural adjustments rather than a rejection of sustainable finance. Several major UK institutions shifted capital from pooled ESG funds to customized segregated mandates, reflecting a change in implementation rather than a wholesale abandonment of sustainability principles.

Europe currently represents approximately 84% of global sustainable fund assets, highlighting the extensive integration of ESG principles within its regulatory and institutional frameworks. Sustainability considerations are incorporated into product design, supervisory expectations, and disclosure requirements.

Asia’s Expanding Role in Sustainable Finance

Asia demonstrates a more nuanced yet increasingly positive trajectory in sustainable finance.

In public markets, sustainable fund inflows during early 2025 were primarily driven by South Korea, Taiwan, and Thailand [5].

• Taiwan’s rapidly expanding exchange-traded fund (ETF) market, currently the third largest in Asia, has facilitated continuous inflows into domestically domiciled sustainable funds.

• Tax incentives for ESG mutual funds in Thailand have further stimulated investor demand.
• China recorded a marginal inflow in the first quarter of 2025 following an extended period of outflows, supported by broader ETF market strength and regulatory support for green finance.

While Asia remains smaller in aggregate than Europe, policy support, retail participation and infrastructure-led growth suggest a gradually deepening regional commitment to sustainable capital markets.

Performance: Resilience Amid Volatility

In addition to asset flows and political narratives, performance data further challenge the notion of a retreat in sustainable finance.

Morningstar data show that global large-cap sustainable funds achieved a 2.09% gain in the first quarter of 2025, outperforming conventional peers that reported losses. These sustainable funds demonstrated resilience during periods of market weakness by remaining in positive territory while broader markets declined. The performance gap increased in April as conventional indexes experienced further declines. Despite tariff-related volatility in April 2025, sustainable funds sustained their year-to-date outperformance [5].

IEEFA [5]

These results indicate that, despite headline volatility and political scrutiny, sustainable investment strategies continue to demonstrate financial competitiveness within diversified portfolios.

Regulation and the Future Direction of Sustainable Finance

Ultimately, the long-term viability of sustainable finance relies more on robust regulatory frameworks than on alliance rhetoric. As voluntary coalitions grow less visible, formal policy structures increasingly determine how capital incorporates climate and sustainability risks.

In the United States, political disputes and increased legal scrutiny have introduced uncertainty regarding ESG-related commitments. In contrast, the European Union is enhancing its sustainable finance framework. Proposed updates to the Sustainable Finance Disclosure Regulation (SFDR 2.0) would replace broad transparency categories with more precise fund classifications, including “sustainable,” “transition,” and “impact,” with implementation expected between 2027 and 2028 [6]. These reforms are intended to reduce greenwashing risk, improve comparability, and strengthen investor confidence.

The United Kingdom is progressing in a comparable direction. Consultations scheduled for 2026 on Sustainability Reporting Standards, which aim to develop a UK-specific version of the ISSB's IFRS S1 and S2 standards that may become mandatory for large companies and listed issuers while maintaining interoperability with global capital markets, demonstrate advancement toward assured, decision-useful climate-related disclosures integrated into annual reports [7]. This strategy incorporates targeted UK modifications to the ISSB baseline, aligning company law and Financial Conduct Authority (FCA) regulations to replace voluntary supplementary measures with consistent and comparable sustainability data across markets.

Taken together, these developments underscore a broader shift: regulation is becoming the primary mechanism through which sustainable finance is defined, supervised, and institutionalised.

Backlash or Transition?

The ESG backlash is evident, particularly in certain regions of the United States, where legal risks and political pressures have altered public commitments. However, global data reveal a more complex and differentiated landscape.

Capital is not retreating uniformly. In many regions, sustainable finance is becoming institutionalised, regulated, and embedded within mainstream allocation frameworks. Assets continue to grow over multi-year periods. Infrastructure and bond markets are increasingly aligned with transition objectives, and performance remains broadly competitive.

These developments suggest not a decline in sustainable finance, but rather its evolution. The sector is shifting from voluntary, alliance-driven pledges toward a more mature framework grounded in regulation, risk management, and long-term capital allocation.

• [1] https://trellis.net/article/exodus-by-big-banks-from-climate-finance-alliance-chided-as-disgraceful-reversal/
• [2] https://www.netzeroassetmanagers.org/update-from-the-net-zero-asset-managers-initiative/
• [3]https://assets.contentstack.io/v3/assets/blt9415ea4cc4157833/blt1d54e64f88b82b3b/Global_ESG_Flows_Q4_2025_Report.pdf
• [4] https://www.giia.net/news/report-esg-fundraising-reaches-record-highs-2024-amid-market-challenges
• [5] https://ieefa.org/sites/default/files/2025-07/IEEFA%20Briefing%20Note_Sustainable%20Investing%20Outlook%20-%20Strong%20Returns%20Amid%20Net%20Flow%20Pressures_July2025.pdf
• [6] https://www.regulatoryandcompliance.com/2025/11/sfdr-2-0-officially-launched-by-european-commission/
• [7] https://www.aoshearman.com/en/insights/financial-services-horizon-report-2026/sustainability-and-esg-in-2026
• [8] https://www.ft.com/content/8d0c1064-881e-42b4-9075-18e646f3e1ad