ESG investing isn’t dead. It’s evolving under pressure.

In recent months, headlines proclaiming the death of ESG investing have grown louder.

From record fund outflows to political pushback in the United States, it’s easy to fall into the narrative that the environmental, social and governance approach to investing has run its course.

Those stories, however, miss the deeper reality. ESG is not dead, it’s adapting to a more complex market environment and evolving client expectations.

That said, there is no denying that 2025 was a challenging year for ESG-labelled funds.

According to Morningstar data, global sustainable funds recorded roughly $84 billion in net outflows over the past year, a sharp reversal from the $38 billion of inflows recorded in 2024. Outflows intensified in the final quarter, underscoring investor caution in certain regions and sectors.

Political opposition, alongside high-profile legal and regulatory challenges, has added friction. Several asset managers have adjusted product names or repositioned strategies to reduce the prominence of the ESG label.

Viewed narrowly, the optics appear negative.

Yet focusing solely on US flows distorts the global picture. Sustainable investing remains a multi-trillion-dollar segment of global capital markets.

In Europe, sustainable assets under management remain substantial, supported by regulatory frameworks such as the Sustainable Finance Disclosure Regulation. Article 8 strategies saw renewed inflows during parts of 2025, even as Article 9 products faced scrutiny and consolidation.

What this suggests is not abandonment, but that investors are becoming more selective.

Part of the US slowdown reflects politics rather than fundamentals. ESG became entangled in ideological debate, particularly around energy policy and fiduciary duty.

History teaches us that as investment terminology becomes politicised, hesitation follows. However, removing a label doesn’t eliminate the financial risks that the label sought to capture.

Climate transition risk continues to shape corporate strategy and valuation. Extreme weather events influence insurance pricing and infrastructure investment. Governance failures still destroy shareholder value with alarming speed. Supply chain resilience, labour practices and regulatory exposure directly affect earnings durability.

Investors who incorporate these factors into financial models are engaging in risk assessment, not advocacy.

Performance data complicates the narrative further. During several reporting periods in 2025, sustainable funds delivered returns broadly comparable to, and in some cases exceeding, conventional peers, particularly where exposure to energy transition, electrification and infrastructure modernisation was present.

Clean energy and climate-transition strategies ranked among stronger-performing categories during specific quarters, supported by renewed capital expenditure and policy commitments in multiple jurisdictions.

Market cycles have always influenced style leadership. The sharp rise in interest rates through 2022 and 2023 favoured traditional energy and value sectors, which diluted the relative performance of some ESG-heavy portfolios.

And as inflation pressures moderated and expectations around rate stability improved, sector rotation resumed.

Of course, demographics remain a powerful undercurrent. Younger investors consistently express a stronger preference for sustainability-linked allocations.

With significant intergenerational wealth transfer expected over the coming decades, capital allocation priorities are likely to reflect those preferences. Institutional asset managers recognise this trajectory, even when short-term flows fluctuate.

Perhaps more importantly, ESG is undergoing maturation.

Early iterations often relied on broad exclusion screens and composite scoring methodologies that lacked transparency.

Regulatory scrutiny in Europe and elsewhere has tightened disclosure requirements and heightened sensitivity to greenwashing. Investors are demanding clearer evidence of financial materiality and measurable impact.

This refinement is healthy, I believe. Integration is moving closer to core financial analysis. Carbon pricing assumptions are being embedded into discounted cash flow projections, board composition and executive incentives are examined through the lens of capital allocation discipline, and exposure to environmental regulation is factored into risk premiums and credit spreads.

These considerations are increasingly mainstream, regardless of whether a fund carries an ESG label.

Global capital expenditure patterns reinforce this trajectory. Investment in electrification, grid resilience, battery storage and industrial decarbonisation continues across major economies.

Corporates are adjusting supply chains to meet both regulatory and consumer expectations; financial institutions are incorporating climate stress testing into risk frameworks; and insurance markets are recalibrating pricing based on environmental exposure.

ESG investing benefited from a powerful narrative tailwind in the late 2010s and early 2020s. The recent period has exposed weaknesses in branding and methodology, forcing consolidation and discipline.

What remains, I expect, is a more rigorous approach, increasingly anchored in measurable financial risk and opportunity.

Claims of its demise overlook this evolution.

The acronym may feature less prominently in marketing materials, particularly in the US, but the underlying integration of environmental, social and governance factors into valuation and portfolio construction continues.

Nigel Green is deVere CEO and Founder

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