More than 123 trillion won in capital flowed out of global environmental, social, and governance (ESG) funds last year on a net basis, marking the first time outflows exceeded inflows since ESG funds emerged eight years ago. Analysts attribute the strong anti-ESG trend to doubts about the feasibility of carbon reduction goals and underperformance compared to artificial intelligence (AI) and defense sector investments.
According to Morningstar Sustainalytics, a global investment advisory firm, a total of $84 billion (approximately 123.4 trillion won) was withdrawn from ESG funds in 2024. This marks the first net outflow since the firm began tracking such data in 2018. Investment pullbacks were pronounced across all regions, including Europe—the birthplace of ESG investing—and the United States. During the same period, South Korea saw net outflows of $1.6 billion (approximately 2.3 trillion won), with only one new ESG fund launched.
Europe Also Turns Away from ESG; Korea Launches Just 1 New Fund
■ First-Ever Net Outflows from Global ESG Funds
- Europe shifts toward pragmatism, easing carbon emission regulations
- U.S. sees 13 consecutive quarters of fund outflows amid intensifying anti-ESG sentiment
- Investment capital flows toward higher-return AI and defense sectors
- "Paradoxically, stricter regulations push funds to drop ESG labels"
With a record $84 billion (approximately 123.4 trillion won) in investment capital exiting global ESG funds last year for the first time ever, analysts say ESG investing faces its greatest crisis. ESG investing, which began gaining mainstream traction in the 2000s and attracted an astronomical $649.1 billion (approximately 952.8 trillion won) in 2021 alone, now confronts the prospect of negative growth. "ESG is facing strong headwinds," said Hortense Bioy, head of sustainable investing research at Morningstar Sustainalytics.
Investment pullbacks in ESG became pronounced across all regions last year—the U.S., Europe, and Asia alike. The decisive blow came from massive ESG redemptions in Europe, its birthplace. Europe had previously maintained its stance of strengthening ESG commitments despite repeated waves of "ESG skepticism."
However, the tide turned when European ESG funds recorded net outflows of $1.2 billion in January 2024—the first since Sustainalytics began tracking in 2018. Outflows subsequently ballooned to $49.6 billion in the third quarter and $20 billion in the fourth quarter of the same year. The timing of Europe's sudden anti-ESG shift coincides with the return of U.S. President Donald Trump to the White House in January last year—a leader who has called climate change "a hoax." The U.S. financial sector rapidly began withdrawing from ESG investments, and this sentiment spread to Europe.
However, analysts say U.S. influence alone cannot explain Europe's change of heart on ESG. Sustainalytics emphasized that "while British institutional investors—a pillar of European ESG investment—redeeming ESG funds played a role, fundamentally ESG investing in Europe has encountered significant obstacles." Indeed, at the end of last year, the European Union completely withdrew its plan to phase out internal combustion engine vehicles by 2035, signaling a moderation in the pace of carbon reduction. Bloomberg, citing sources, reported that the EU plans to significantly ease greenhouse gas emission regulations targeting thousands of companies within the bloc. This indicates Europe itself has raised questions about the practicality of decarbonization, prompting a change in direction.
The Canadian government also announced on January 5 (local time) a revised automotive industry plan that steps back from its goal of making 100% of new car sales electric vehicles by 2035, while still emphasizing that the transition from internal combustion vehicles to EVs remains the industry's direction. In the U.S., anti-ESG sentiment runs strong regardless of the Trump administration's influence, with 13 consecutive quarters of net fund outflows through the fourth quarter of last year.
Asia is also seeing a contraction in green portfolios, with $2.2 billion flowing out of China—the world's largest renewable energy producer—in the third quarter of last year (fourth-quarter data not yet released). South Korea saw $1.6 billion (approximately 2.4 trillion won) in outflows in the fourth quarter of last year. Notably, only one new ESG fund was launched domestically last year, far fewer than in China (15) or Thailand (38).
High returns from AI and defense sector investments in the stock market also contributed to waning interest in ESG investing. Consequently, the proportion of ESG funds outperforming general funds dropped sharply from 45% in 2024 to 26% last year. U.S. asset manager WestFinancial Services noted in a recent report that "there are limits to how long investors will continue ESG investing while tolerating poor returns."
Notably, as countries strengthen regulations for carbon reduction, markets are increasingly shunning ESG investments. In response to tightened ESG regulations including disclosure requirements by U.S. and European authorities, funds have been removing "ESG" from their names. In Europe, 1,450 funds dropped ESG from their names between January 2024 and May of last year. The number of ESG funds in the U.S. fell 8% to 595 as of the end of September last year from 647 at the start of the year. Paradoxically, regulations intended to expand ESG investing have resulted in its contraction.
Attention is now focused on whether this trend will affect South Korea's market and policies. The Financial Services Commission plans to announce the final ESG disclosure standards as early as the end of this month. The FSC intends to strengthen regulations by expanding the scope of greenhouse gas measurement to cover the entire supply chain (Scope 3). The commission explains that enhanced ESG regulations are essential, noting that Scope 3 disclosure is already implemented in the EU and Japan has announced mandatory requirements starting next year.