Sustainable Fund Launches Plummet Amid Regulatory Scrutiny and Performance Woes

The global sustainable fund market is experiencing a significant contraction, with new fund launches plummeting and closures accelerating in the second quarter amid poor performance, heightened regulatory scrutiny, and shifting investor sentiment. Asset managers are increasingly rethinking their sustainable product strategies as the sector faces headwinds from multiple fronts.

By the Numbers: A Sharp Contraction

Data from Morningstar reveals a dramatic slowdown in product development across major markets in the second quarter. The trend indicates a clear reversal from the rapid expansion seen in previous years.

• Europe, the largest market, saw a record low of just 13 new fund launches, a nearly two-thirds decline from the 35 launched a year prior. With 64 funds closing during the same period, nearly five funds were shuttered for every new one created.
• In the United States, only 3 sustainable funds were launched, while 22 were closed.
• Canada, Australia, and New Zealand recorded their second consecutive quarter with no new sustainable fund launches.

Since tougher European Union disclosure rules were implemented in January 2023, 956 sustainable funds have been pulled from the market, compared with only 691 launches over the same period, according to Morningstar.

Headwinds from Performance and Regulation

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Underperformance has been a key factor driving investor caution. Over the five years to July 2026, the broad MSCI ACWI index returned approximately 65%, while the socially responsible MSCI ACWI SRI index returned a lower 56%, according to LSEG data. Stuart Clark, a portfolio manager at Quilter, attributed this lag to a lack of exposure to strong-performing sectors like fossil fuels and defense.

At the same time, a stricter regulatory environment is forcing asset managers to be more cautious. Regulators are cracking down on "greenwashing," or misleading sustainability claims, exemplified by a €25 million fine levied against DWS by German prosecutors last year. "Regulatory uncertainty, greenwashing concerns and the political backdrop continue to influence both fund flows and product development," said Monika Calay, director of UK manager research at Morningstar.

Shifting Investor Tides

Despite the product development slump, sustainable funds globally still attracted net inflows of $3.7 billion in the second quarter, bringing total assets to $3.73 trillion. However, the data shows a clear preference for more selective strategies.

Investors are increasingly favoring passive and fixed-income products over active equity funds. In Europe, passive sustainable funds attracted around $11 billion, while active funds saw outflows of $7.8 billion. Similarly, sustainable fixed-income funds gathered over $14 billion as sustainable equity funds shed about $9 billion. This trend suggests that while the appetite for sustainable investing persists, it has become more "nuanced," according to Stuart White, executive director at Impax Asset Management.