Sustainable Investing and ESG Factors in 2025: Navigating a Shifting Landscape
This is part one of a multi-part series exploring the State of Impact Investing in 2025.
In 2025, ESG factors and sustainable investing are facing unprecedented headwinds—and new opportunities. From regulatory rollbacks in the US to shifting rhetoric and resilient investor demand, values-aligned investors must navigate a fractured, politically charged terrain.
Attacks on Environmental, Social, and Governance (ESG) investing, Diversity, Equity & Inclusion (DEI) and climate solutions initiatives and regulations like the Inflation Reduction Act and the Greenhouse Gas Reduction Fund will continue to reverberate through the industry for the foreseeable future. In this piece, I will share some of the areas where we are seeing significant changes that values-aligned investors may wish to pay close attention to as we move into the second half of 2025.
Terminology Shifts in Response to Political Pressure
Integrating environmental, social, and governance (ESG) in the investment decision-making process means assessing material, non-financial factors that can significantly affect an investment’s risks and opportunities.
Amid increasing political hostility and legislative pressures against ESG, we have seen signs that some investors and asset managers have adjusted their language to navigate the challenging environment.¹ Terms like “sustainable investing”, “responsible investing”, and “SRI investing” (interpreted variably as Sustainable, Resilient, and Innovative or Sustainable, Responsible, and Impact) are becoming more prevalent as stakeholders attempt to maintain clarity and avoid the controversies associated with the term “ESG.” SRI investing was used in the past and stood for socially responsible investing in the early days.
The shift in terminology is less relevant, what matters is that investors continue to utilize and integrate these material non-financial factors in investment decision making and shareholder advocacy.
Evolving Federal and State Policies
During this second Trump administration, the political environment in the United States is sharply divided on ESG considerations and we are seeing shifts in the regulatory landscape at both federal and state levels.
At the federal level, the Securities and Exchange Commission (SEC) announced in March that it will no longer defend its climate-risk disclosure rule.² In June, the SEC also withdrew a proposed rule issued during the Biden Administration that would have required certain investment advisers and companies to disclose more information regarding their ESG strategies and investment practices.³ This rule was intended to make it easier for investors to compare ESG funds.
The Department of Labor (DOL) has indicated that it will amend the rule that allows ERISA fiduciaries to consider ESG factors in investment decisions, which will revert to the rule created under the first Trump administration that dismissed ESG factors from fiduciary considerations.⁴
At the state level, ESG-related legislation has become a significant political battleground. Republican-led states have intensified their efforts to pass anti-ESG laws. As of 2025, thirteen states enacted legislation prohibiting banks and governmental agencies from using ESG criteria to assess eligibility for financial services.⁵ Additionally, these laws forbid officials managing public funds, including pension investments, from considering ESG factors.
Conversely, Democratic-led states have actively countered this movement. States like California, Maine, Oregon, Rhode Island, Colorado, Maryland, Illinois and Massachusetts notably passed pro-ESG legislation with some states mandating the consideration of ESG factors in state contracts,⁶ highlighting the sharp partisan divide over ESG practices. In the absence of federal mandates, state level legislation like California’s climate disclosure rule will likely shape corporate disclosures in the US. However, this fragmented landscape could lead to inconsistent disclosure and reporting.
International Regulatory Developments
Internationally, the European Union has seen postponing reporting deadlines and scaling back in key regulations, including the Corporate Sustainability Reporting Directive (CSRD), the EU Taxonomy, and the Corporate Sustainability Due Diligence Directive (CSSDDD),⁷ reflecting broader global tension around ESG and sustainability frameworks.
Supporters argue that the latest Omnibus Simplification Package reduces the complexity of EU rules while reducing the administrative burdens placed on businesses.⁸ The Sustainable Finance Disclosure Regulation (SFDR) is also in the process of being revised in 2025.⁹ These simplification agendas in EU regulations do not necessarily indicate pull back in support for ESG in Europe, as Europe accounts for 84% of global sustainable fund assets.¹⁰ If anything, European asset owners and pension funds are putting American fund managers on notice who have pulled out of climate alliances or taken a step back on stewardship¹¹ and pulled assets from firms like State Street to prioritize sustainability, active stewardship and long-term value creation.¹²
Investors navigating ESG in 2025 face a complex, rapidly shifting environment requiring adaptability, clarity in language, and strategic engagement to maintain impactful investment practices.
Continued interest in ESG factors and sustainable investing
Despite the challenges and headlines, there continues to be significant interest in ESG and sustainable investing. According to Morgan Stanley’s survey as of March 31, 2025, interest in sustainable investing remains strong with 88% of global individual investors saying they are interested in sustainable investing. Another notable finding is that 99% of Millennial and Gen Z respondents described themselves as either “very interested” or “somewhat interested” in sustainable investing (compared to 72% for baby boomers).¹³ This is particularly important to highlight as we are on the cusp of unprecedented wealth transfer with $83 trillion expected to be passed on to the younger generation within the next two decades. Also important to highlight that a majority of investors say their interest in sustainable investing has significantly or somewhat increased in the last year.
A recent BNP Paribas survey of asset owners, asset managers and private capital firms across 29 countries representing $33.8 trillion in assets showed that 87% say their ESG and sustainability objectives remain unchanged while 84% believe the pace of progress of sustainability is either going to continue or accelerate between now and 2030.¹⁴
Similarly, US-based CEOs ranked climate risk and sustainability as the top two external ESG factors likely to impact their business in 2025.¹⁵ It is also notable that 65% of global CEOs reported they have embedded ESG in their strategy — with the majority stating that the business case for ESG initiatives is well considered in Return on Investments and Net Income.
Inflows and Outflows
According to Morgan Stanley, global sustainable funds’ AUM reached a new absolute high of $3.56 trillion as of December 2024, up 4.8% from December 2023 and saw inflows of $54.7 billion in 2024.¹⁶
Morningstar data showed $8.6 billion outflows from sustainable funds in Q1 of 2025 after a relatively strong quarter of over $18 billion in inflows in Q4 2024.¹⁷ However, it should be noted that the outflows seen in Q1 of this year represent just a fraction of the global AUM. Some of the outflows in Europe may be attributed to asset managers rebranding (dropping or changing ESG related terms) product names ahead of the anti-greenwashing rule deadline in Europe.
Performance
According to Morgan Stanley, sustainable funds have outperformed traditional funds over a longer period and a hypothetical $100 investment in a sustainable fund in December 2018 would be $136 as of December 2024, while the same $100 invested in a traditional fund would be $131 over the same period.¹⁸
While sustainable funds lagged their benchmark in 2022 and 2023 after three years of outperformance from 2019-2021, the 2024 performance picture is mixed.¹⁹ In Q1 of 2025, performance of global large-cap sustainable funds held up well as these funds advanced 2.09% on average compared to a loss of 1.58% for the MSCI ACWI large cap index. The 2022 and 2023 underperformance can be attributed to the energy sector outperformance after the start of the Russia-Ukraine war, pull back of COVID winners and the rise of Magnificent Seven stocks – some of which are not represented in many sustainable funds. As such, it is important for asset owners to talk to their advisors about the financial impact of exclusionary and inclusionary screens and tilts in their portfolios.
Conclusion: ESG is Adapting to Meet the Moment
Despite political pushback and regulatory fragmentation, I believe that ESG investing is adapting to meet the moment – not retreating. Investors, particularly the next generation inheriting trillions in assets, continue to demand strategies that align with their values and long-term vision. While language may shift and headlines may distract, the underlying rationale for integrating ESG—managing risk, identifying opportunity, and driving impact—remains intact. For sustainable investors, this moment is not a signal to step back, but a call to stay informed, stay engaged, and help shape the next chapter of sustainable finance.
Read the post that launched this series: The State of Sustainable and Impact Investing.
Roraj Pradhananga’s next article will cover the shifting landscape for shareholder advocacy. It will be published in July of 2025.
Roraj Pradhananga is the Chief Investment Officer at Veris Wealth Partners. Roraj is a Certified Investment Management Analyst (CIMA®) and Certified Public Accountant (CPA) with over 17 years of experience across the financial services industry. Bio.
Sources
1. https://kpmg.com/xx/en/our-insights/value-creation/kpmg-global-ceo-outlook-survey-2024.html
2. https://www.sec.gov/newsroom/press-releases/2025-58
6. Reform proposals related to environmental, social, and corporate governance (ESG) – Ballotpedia
7. EU Omnibus Update – Recent Developments relating to CSRD and CSDDD – “quick fix” and more
8.https://finance.ec.europa.eu/news/omnibus-package-2025-04-01_en#
9. EU Commission delays SFDR revision until Q4 2025 in ‘simplification’ drive – ESGWise
14.https://securities.cib.bnpparibas/bnp-paribas-esg-survey-2025-press-release/
15. https://corpgov.law.harvard.edu/2025/02/03/ceo-and-c-suite-esg-priorities-for-2025/
18. https://www.morganstanley.com/insights/articles/sustainable-funds-performance-second-half-2024
Disclaimer
The information contained herein is provided for informational purposes only and should not be construed as the provision of personalized investment advice, or an offer to sell or the solicitation of any offer to buy any securities. Rather, the contents including, without limitation, any forecasts, projections, and forward-looking statements simply reflect the opinions and views of the authors.
All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change without notice. There is no guarantee that the views and opinions expressed herein will come to pass. Additionally, this document contains information derived from third party sources. Although we believe these third-party sources to be reliable, we make no representations as to the accuracy or completeness of any information derived from such third party sources and take no responsibility therefore. Information related to the performance of certain benchmark indices is provided for illustrative purposes only as investors cannot invest directly in an index. Past performance is not indicative of or a guarantee of future results. Investing involves risk, including the potential loss of all amounts invested.
